Question
CIA Susan Prescott is a foreign exchange trader for a bank in New York. She has $1 million (or its Swiss franc equivalent) for a
CIA Susan Prescott is a foreign exchange trader for a bank in New York. She has $1 million (or its Swiss franc equivalent) for a short term money market investment and wonders if she should invest in U.S. dollars for three months, or make a covered interest arbitrage (CIA) investment in the Swiss franc. She faces the following quotes:
Assumptions
Value
SFr. Equivalent
Arbitrage funds available
$1,000,000
SFr. 994,000
Spot exchange rate (SFr./$)
.9940
3-month forward rate (SFr./$)
.9910
U.S. dollar 3-month interest rate
2.600% pa
Swiss franc3-month interest rate
1.600% pa
What should Susan do?
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