1. Consider the following prices:

S: The dollar price of the SF on the spot market. = $1.0440

F: The dollar price of the SF on the forward market, for delivery of SF, three months from today = $1.0405

i: The annualized interest rate on a 3-month asset in the United States = 0.03

i*: The annualized interest rate on an identical 3-month asset in Switzerland =0.04.

1. Use the no-arbitrage condition to show that a covered interest rate arbitrage opportunity exists. Specifically state which currency we should borrow in and briefly discuss why.
2. Suppose the trader starts by borrowing $10,000,000 or SF 10,000,000. Please note that only one of these is correct, based on your answer from part (a) above. Please demonstrate exactly how much profit can be made from exploiting the arbitrage opportunity.
3. In exploiting the arbitrage opportunity above, market prices will likely respond once you have left the market. Briefly explain how each of the following likely changes after you leave the market.
4. Spot rate quoted as dollar per SF
5. Interest rates in the United States
6. Interest rates in Switzerland
7. Forward rate quoted as dollar per SF