Question
Heidi Hi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $4.95 million, or the foreign currency equivalent of the bank's short term
Heidi Hi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest
$4.95
million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. She is now evaluating the arbitrage profit potential in the same market after interest rates change. (Note that anytime the difference in interest rates does not exactly equal the forward premium, it must be possible to make CIA profit one way or another.)
Arbitrage funds available | $ | 4,950,000 | |
Spot exchange rate (kr/$) | 6.1717 | ||
3-month forward rate (kr/$) | 6.1984 | ||
U.S. dollar annual interest rate | 4.100 | % | |
Danish krone annual interest rate | 4.900 | % |
Question content area bottom
Part 1
The CIA profit potential is
enter your response here%,
which tells Heidi that she should borrow
Danish krone
U.S. dollars
and invest in the
higher
lower
interest rate currency,
the dollar
the krone
, gaining on the re-exchange of dollars for krone at the end of the period. (Round to three decimal places and select from the drop-down menus.)
CIA Profit= ____
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started