Question: Question 2 (12 marks) Josephine, a foreign exchange trader at Credit Swiss, can invest A$5 million, or its the foreign currency equivalent, in a

Question 2 (12 marks) Josephine, a foreign exchange trader at Credit Swiss, can invest A$5 million, or its the foreign currency equivalent, in a covered interest arbitrage with Denmark. She has collected the following market data for the arbitrage strategy: DATA Arbitrage funds available Spot exchange rate (kr/A$) 3-month forward rate (kr/A$) Australian dollar 3-month interest rate Danish kroner 3-month interest rate Required: a) VALUES A$ 5,000,000 4.7815 4.8665 4.00% p.a. 6.00% p.a. Do the market data indicate an opportunity for Josephine to conduct a covered interest arbitrage? Explain why. (3 marks) b) How should Josephine do the covered interest arbitrage? (3 marks) c) How much is Josephine's covered interest arbitrage profit? You may use a diagram to show the specific steps and the corresponding cash flows. (6 marks)

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