James Clark is a foreign exchange trader with Citibank. He notices the following quotes.

Spot exchange rate SFr1.2051/$

Six-month forward exchange rate SFr1.1922/$

Six-month $ interest rate 2.5% per year

Six-month SFr interest rate 2.0% per year

A)Is the interest rate parity holding? You may ignore transaction costs.

B)Is there an arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in dollars.

C)Repeat the spreadsheet analysis as above, but this time obtaining two NPV values (when parity conditions do not hold) in Euros rather than pesos.