James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate ................SFrl.2051/$

Question:

James Clark is a currency trader with Wachovia. He notices the following quotes:

Spot exchange rate ................SFrl.2051/$

Six-month forward exchange rate ...........SFrl.1922/$

Six-month dollar interest rate ..................2.50% per year

Six-month Swiss franc interest rate .........2.0% per year

a. Is the interest rate parity holding? You may ignore transaction costs.

b. Is there an arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in dollars.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...