Question
Tony Campbell is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short-term
Tony Campbell is 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 Tony wonders if he
should invest in U.S. dollars for three months, or make a covered interest arbitrage investment
in the Swiss franc. He faces the following quotes:
Arbitrage funds available $1,000,000
Spot exchange rate (SFr./$) 1.2810
3-month forward rate (SFr./$) 1.2740
U.S. dollar 3-month interest rate 4.800%
Swiss franc3-month interest rate 3.200%
Assess Tonys decision Covered Interest Arbitrage (CIA) opportunity. Should he
undertake CIA?
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