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Mary Gold is a foreign exchange trader for a bank in New York. She observes the following rates: Spot exchange rate: SF 0.9872/$ 3-month forward
Mary Gold is a foreign exchange trader for a bank in New York. She observes the following rates: Spot exchange rate: SF 0.9872/$ 3-month forward rate: SF 0.9907/$ 3-month U.S interest rate: 2% per annum 3-month Swiss interest rate: 4% per annum a) Can you help Ms. Gold identify whether there is an arbitrage opportunity or not by calculating the theoretical forward rate? b) Can you help Ms. Gold form a covered interest arbitrage strategy to generate profit? Please describe each step of the covered interest arbitrage and show the arbitrage profit. If she has to borrow any currency, please borrow 1,000,000 c) Please calculate the SF forward discount. Is it higher or lower than the current interest rate difference? Which action(s) in part b. would help bring the forward discount to be in line with the interest rate difference? Mary Gold is a foreign exchange trader for a bank in New York. She observes the following rates: Spot exchange rate: SF 0.9872/$ 3-month forward rate: SF 0.9907/$ 3-month U.S interest rate: 2% per annum 3-month Swiss interest rate: 4% per annum a) Can you help Ms. Gold identify whether there is an arbitrage opportunity or not by calculating the theoretical forward rate? b) Can you help Ms. Gold form a covered interest arbitrage strategy to generate profit? Please describe each step of the covered interest arbitrage and show the arbitrage profit. If she has to borrow any currency, please borrow 1,000,000 c) Please calculate the SF forward discount. Is it higher or lower than the current interest rate difference? Which action(s) in part b. would help bring the forward discount to be in line with the interest rate difference
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