A US investor sees an arbitrage opportunity in the foreign exchange markets.The spot exchange rate between Swiss
Fantastic news! We've Found the answer you've been seeking!
Question:
A US investor sees an arbitrage opportunity in the foreign exchange markets. The spot exchange rate between Swiss Franc and US Dollar is 1.0404 ($ per CHF). Assume that continuously compounded interest rates in the United States and Switzerland are 0.25% and 0%, respectively. The 3-month forward foreign exchange price is 1.0300 ($ per CHF).
a) What is the theoretically correct forward price?
b) What is the investor's total profit (in CHF), assuming he starts by borrowing CHF 1,000?
Related Book For
International Economics Theory and Policy
ISBN: 978-0134519579
11th Edition
Authors: Paul R. Krugman, Maurice Obstfeld, Marc Melitz
Posted Date: