-Heidi Hi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. She is now evaluating the arbitrage profit potential in the same market after interest rates change. (Note that anytime the difference in interest rates does not exactly equal the forward premium, it must be possible to make CIA profit one way or another.)

Arbitrage funds available	$	5,000,000
Spot exchange rate (kr/$)		6.1722
3-month forward rate (kr/$)		6.1982
US dollar annual interest rate		3.000	%
Danish kroner annual interest rate		5.950	%

Question content area bottomThe CIA profit potential is 1..272%, which tells Heidi Hi Jensen that she should borrow U.S. dollars and invest in thehigher interest rate currency, the krone , gaining on the re-exchange of kroner for dollars at the end of the period.(Round to three decimal places and select from the drop-down menus.)

Part 1/2 The CIA profit amount is (Round to the nearest cent.)?

-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, rather than the Norwegian krone, as its functional currency. Ari Karlsen is a currency trader for Statoil, and has immediate use of either $3.05 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.

Abitrage funds available $ 3,050,000 Spot exchange rate (Nok/$) 6.0313 3-month forward rate (Nok/$) 6.0183 U.S. dollar annual interest rate 4.997 % Norwegian krone annual interest rate 4.449 % Question content area bottom

Part 1 The CIA profit potential is enter your response here %, which tells Ari Karlsen he should borrow (Norwegian krones or U.S. dollars) and invest in the )higher or lower yielding currency), the ) Norwegian krone or U.S. dollar) , selling the dollars forward 90 days, and therefore earn covered interest arbitrage (CIA) profits.(Round to four decimal places and select from the drop-down menus.)

Part 2) The CIA profit amount is

-The amount you should budget as the U.S. dollar cost of the 1-week rental I(Round to the nearest cent.) Grupo Bimbo, headquartered in Mexico City, is one of the largest bakery companies in the world. On January 1st, when the spot exchange rate isPs10.81/$, the company borrows $24.8 million from a New York bank for one year at 6.76% interest (Mexican banks had quoted 9.63% for an equivalent loan in pesos). During that year, U.S. inflation is 2.1% and Mexican inflation is 4.4%. At the end of the year the firm repays the dollar loan.

3. If Bimbo expected the spot rate at the end of one year to be equal to purchasing power parity, what would be the cost to Bimbo of its dollar loan in peso-denominated interest?

4. What is the real interest cost (adjusted for inflation) to Bimbo, in peso-denominated terms, of borrowing the dollars for one year, again assuming purchasing power parity?

5. If the actual spot rate at the end of the year turned out to be Ps9.64/$, what was the actual peso-denominated interest cost of the loan?