Statoil, the national oil company of Norway, is a large, sophisticated, and active participant in both the currency and petrochemical markets. Although it is a Norwegian company, because it operates within the global oil market, it considers the U.S. dollar as its functional currency, not the Norwegian krone. Ari Karlsen is a currency trader for Statoil, and has immediate use of either $3 million (or the Norwegian krone equivalent). He is faced with the following market rates, and wonders whether he can make some arbitrage profits in the coming 90 days. Krone Equivalent 18,093,600 Assumptions Arbitrage funds available Spot exchange rate (Nok/S) 3-month forward rate (Nok/S) U.S. dollar 3-month interest rate Norwegian krone 3-month interest rate Difference in interest rates (i Nok - iS) Forward premium on the krone CIA (Covered Interest Arbitrage) profit Value $3,000,000 6.0312 6.0186 5.000% 4.450% -0.550% 0.835% Does this % tell Ari Karlsen he should borrow U.S. dollars and invest in the lower yielding currency, the Norwegian krone, selling the dollars forward 90 days, and therefore earn covered interest arbitrage (CIA) interest arbitrage profits? Norwegian kroneinterestrate (3- month) 4.450% 1.0111250 18,093,600.00 1 Forward-90 Spot (Nok/S) 90 days (Nok/S) 6.0312 6.0186 1 1 $3,000,000.00 1.01250000 Borrow USS 5.000% START U.S. dollar interest rate (3-month) END What can Ari Karlsen make for Statoil on each $3 million he invests in this covered interest arbitrage (CIA) transaction. Annualized rate of return: The authors "note that this is a very slim rate of return on an investment of such a large amount Not to chastise "the authors" (again), but the return may not be so small. Why