Problem $6\mathrm{.}12$

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

Spot exchange rate $,$ SFr$1\mathrm{.}2052$ per $

Six$-$month forward exchange rate SFr$1\mathrm{.}1923$ per $

Six$-$month Dollar interest rate $2\mathrm{.}5\%$ per year

Six$-$month Swiss franc interest rate $2\mathrm{.}0\%$ per year

Required:

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

b$.$ What steps should be taken to make arbitrage profit? Assuming that James Clark is authorized to work with $$1,000,000.$ Compute

the arbitrage profit.

Complete this question by entering your answers in the tabs below.

What steps should be taken to make arbitrage profit? Assuming that James Clark is authorized to work with $$1,000,000.$ Compute

the arbitrage profit.

Note: Round off the final answer to nearest whole dollar.

What steps should be taken to make arbitrage profit?

Borrow at the dollar interest rate and invest at the Swiss franc rate. Hedge

exchange rate risk by selling Swiss francs forward.

Arbitrage profit

$