Question
Question 1 a)Matt Damonis a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a
Question 1
a)Matt Damonis a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short-term money market investment and wonders whether he should invest in U.S. dollars for 90 days or make a covered interest arbitrage (CIA) investment in the Swiss franc. He faces the following quotes:
Assumptions
Value
Arbitrage funds available
$1,000,000
Spot exchange rate (CHF/USD)
0.9452
3-month forward rate (CHF/USD)
0.9410
US dollar 3-month interest rate
6.800%
Swiss franc 3-month interest rate
4.300%
Should he enter into a covered interest arbitrage? Please show your workings.
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Essentials of Investments
Authors: Zvi Bodie, Alex Kane, Alan J. Marcus
10th edition
77835425, 978-0077835422
