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.