Question
Peder Mueller is a foreign exchange trader for a bank in New York. Using the values and assumptions here,,he decides to seek the full 4.804%
Peder Mueller is a foreign exchange trader for a bank in New York. Using the values and assumptions here,,he decides to seek the full 4.804% return available in U.S. dollars by not covering his forward dollar receipts—anuncovered interest arbitrage (UIA) transaction. Assess this decision.
Arbitrage funds available
| USD1,100,000
|
Spot exchange rate (CHF=USD1.00)
| 1.2814
|
3-month forward rate (CHF=USD1.00)
| 1.2743
|
Expected spot rate in 3 months (CHF=USD1.00)
| 1.2701
|
U.S. dollar 3-month interest rate
| 4.804%
|
Swiss franc 3-month interest rate
| 3.204%
|
The uncovered interest arbitrage (UIA) profit amount is $???
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Multinational Business Finance
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
14th edition
133879879, 978-0133879872
