Question: Question 2 (12 marks) Dan. a foreign exchange trader at Credit Swiss. can invest A$2 million. or its the foreign currency equivalent, in a covered

Question 2 (12 marks) Dan. a foreign exchange trader at Credit Swiss. can invest A$2 million. or its the foreign currency equivalent, in a covered interest arbitrage with Denmark. She has collected the following market data for the arbitrage strategy: DATA VALUES m Spot exchange rate (kr/A$) 5.1228 3-month forward rate (krIA$) 5.1775 Australian dollar 3month interest rate 2.00% pa. Danish kroner 3-month interest rate 4.00% pa. Required: a) Do the market data indicate an opportunity for Dan to conduct a covered interest arbitrage? Explain why. (3 marks) b) How should Dan do the covered interest arbitrage? (3 marks) c) How much is Dan's covered interest arbitrage prot? You may use a diagram to show the specic steps and the corresponding cash flows. (6 marks)

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