Question
Copenhagen Covered (A). Heidi Hi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency equivalent of the
Copenhagen Covered (A). Heidi Hi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest
$5
million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. Using the following quotes, can Heidi make a covered interest arbitrage (CIA) profit?
| Arbitrage funds available | $ | 5,000,000 | |
| Spot exchange rate (kr/$) | 6.1722 | ||
| 3-month forward rate (kr/$) | 6.1984 | ||
| U.S. dollar annual interest rate | 3.100 | % | |
| Danish krone annual interest rate | 5.100 | % |
The CIA profit potential is
_____%,
which tells Heidi Hi Jensen that she should borrow_____
Danish krone
U.S. dollar
and invest in the higher yielding currency the _____, for CIA profit.
Danish krone
U.S. dollar
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ISE Foundations Of Financial Management
Authors: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
18th International Edition
1265074658, 9781265074654
