Question: 6. Luis Pinzon is a foreign exchange trader for a bank in New York. He has $1 million for a short term money market investment

6. Luis Pinzon is a foreign exchange trader for a bank in New York. He has $1 million for a short term money market investment and 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 4.8% per annum (1.6% per quarter)

Swiss franc3-month interest rate 3.2% per annum (0.8% per quarter)

(a). Is there a covered interest arbitrage opportunity?

(b). What is the total proceed at the end of the CIA arbitrage?

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