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The Market for Foreign Exchange: An arbitrageur can borrow $2 million or Sf 4.4 million. He checks the market and receives the following information: Spot
The Market for Foreign Exchange:
An arbitrageur can borrow $2 million or Sf 4.4 million. He checks the market and receives the following information:
Spot rate: Sf 2.2000/$
3-month forward rate: Sf 2.1780/$
Swiss 3-month interest rate: 3.5% per quarter or 14% per annum
U.S.3-month interest rate: 4.25% per quarter or 17% per annum
Assume that there is no transaction cost, explain the steps the arbitrageur should take to make a riskless profit. Also calculate the amount of net gain.
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