Desmond is an investment banker in New York and has received $100,000 from his client to

carry out short

-term investment. Consider the following information:

Spot rate for SFr/USD is 1.2810 SFr/1$

90-

day forward rate for SFr/USD is 1.2740 SFr/1$

U.S dollar nominal interest rates is 4.80% per annum.

Swiss Franc nominal interest rates is 3.20% per annum.

a.

Should Desmond invest the $100,000 for 90 days or make a covered interest arbitrage

investment in

the Swiss franc? Show you

r calculation and explain your answer.

(5 marks)

b.

Desmond is considering engaging in uncovered interest arbitrage to save on the cost

of the forward cover and in addition he foresees that the spot price for Swiss

Franc/USD will r

emained the same in 90 days. Calculate and work out how much

profit/loss would be made if his prediction is correct. What advice will you give him?

(3 marks)