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James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate SFr1.2069 per $ Six-month forward exchange rate SFr1.1940 per
James Clark is a currency trader with Wachovia. He notices the following quotes:
| Spot exchange rate | SFr1.2069 per $ |
|---|---|
| Six-month forward exchange rate | SFr1.1940 per $ |
| Six-month Dollar interest rate | 2.5% per year |
| Six-month Swiss franc interest rate | 2.0% per year |
Required:
- Is the interest rate parity holding? You may ignore transaction costs.
- What steps should be taken to make arbitrage profit? Assuming that James Clark is authorized to work with $1,000,000. Compute the arbitrage profit.
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