Question 6 (20 marks) a) In recent years we have witnessed a low interest rate environment. A popular investment strategy has been that of the carry trade. What is a carry trade, and under what conditions and expectations is the carry trade profitable? (10 marks) b) Michael Johnson at JP Morgan (Geneva) is an FX trader and is looking for potential covered interest arbitrage opportunities. He wants to invest for 90 days US$100 million or its Swiss Franc equivalent in a covered interest arbitrage between US Dollars and Swiss Francs. He has the current information below. Is this trade possible? Please explain your answer with calculations. Investment Funds US$100,000,000 Spot Rate (US$/CHF) 0.91 90 Day Forward Rate (US$/CHF) 0.89 90 Day US Dollar Interest Rate 5.12% 90 Day Swiss Franc Interest Rate 1.75%