Luis Pinzon is a foreign exchange trader for a bank in New York. He has $1 million for a short term money market investment and wonders if he should invest in U.S. dollars for three months, or make a covered interest arbitrage investment in the Swiss franc. He faces the following quotes:

Arbitrage funds available $1,000,000

Spot exchange rate (SFr./$) 1.2810

3-month forward rate (SFr./$) 1.2740

U.S. dollar 3-month interest rate 4.8% per annum (1.6% per quarter)

Swiss franc3-month interest rate 3.2% per annum (0.8% per quarter)

A. Is there a covered interest arbitrage opportunity?

B. What is the total proceed at the end of the CIA arbitrage?

*** Hint: - Use IRP equation to check if the equality holds. - If IRP does not hold, then engage in US dollar CIA (covered interest arbitrage) transactions.