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Jason Smith is a foreign exchange trader with Citibank. He notices the following quotes. Spot exchange rate SFr1.6627/$ Six-month forward exchange rate SFr1.6558/$ Six-month $
Jason Smith is a foreign exchange trader with Citibank. He notices the following quotes.
Spot exchange rate SFr1.6627/$
Six-month forward exchange rate SFr1.6558/$
Six-month $ interest rate 3.5% per year
Six-month SFr interest rate 3.0% per year
a. Ignoring transaction costs, is the interest rate parity holding?
b. Is there an arbitrage possibility? If yes, what steps would be needed to make an arbitrage profit? Assuming that Jason Smith is authorized to work with $1,000,000 for this purpose, how much would the arbitrage profit be in dollars?
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