Jack is a foreign exchange traitor for a bank in New York. He has $$1$ million or Swiss franc equivalent available to borrow, and will then invest it in a short$-$term money market investment. He is wondering whether he can make a covered interest rate arbitrage $($CIA$)$ Profits, and or an uncovered interest rate arbitrage $($UIA$)$ profit by borrowing it$,$ either the US dollar or Swiss franc and then investing in the other currency.

He has the following data:

Arbitrage funds available : $1,000,000($or swiss franc equivalent$)$

Spot exchange rate : SFR$1\mathrm{.}2810/$$

$3$ month forward rate: SFR$1\mathrm{.}2740/$$

Forward premium on the Swiss Franc :$2\mathrm{.}198\%($spot $-$ forward$)/$forward x $360/90$

U$.$S$.$ dollar $3$ month interest rate : $4\mathrm{.}8\%$ annually

Swiss Franc $3$ month interest rate : $3\mathrm{.}2\%$ annually

Assess whether UIA is possible. Assume that the exchange rate has remained stable over the last few months, and Jack expects if it changes at all in the next $90$ days it will be SFR$1\mathrm{.}2700/$$$.$ Is there UIA profit potential? Which currency should Jackborrow in and which should he invest in$?$

Given your conclusions to question $1,$ show how jack can make a profit.

What is the exchange rate risk that jack is taking by engaging in UIA? Risky or not risky?