Question: Question 2 (12 marks) Thomas Johnson, a foreign exchange trader at JPMorgan Chase, can invest $10 million, or the foreign currency equivalent of the bank's

Question 2 (12 marks) Thomas Johnson, a foreign exchange trader at

Question 2 (12 marks) Thomas Johnson, a foreign exchange trader at JPMorgan Chase, can invest $10 million, or the foreign currency equivalent of the bank's short-term funds, in a covered interest arbitrage with Denmark. He has collected the following market data for the arbitrage strategy: DATA Arbitrage funds available Spot exchange rate (kr/$) 3-month forward rate (kr/$) U.S. dollar 3-month interest rate Danish kroner 3-month interest rate VALUES $ 10,000,000 6.1920 6.1800 1.00% p.a. 3.00% p.a. Required: a) Do the market data indicate an opportunity for Thomas to conduct a covered interest arbitrage? Explain why. (3 marks) b) How should Thomas do the covered interest arbitrage? (3 marks) c) How much is Thomas' covered interest arbitrage profit? May use a diagram to show the specific steps and the corresponding cash flows. (6 marks) Question 2 (12 marks) Thomas Johnson, a foreign exchange trader at JPMorgan Chase, can invest $10 million, or the foreign currency equivalent of the bank's short-term funds, in a covered interest arbitrage with Denmark. He has collected the following market data for the arbitrage strategy: DATA Arbitrage funds available Spot exchange rate (kr/$) 3-month forward rate (kr/$) U.S. dollar 3-month interest rate Danish kroner 3-month interest rate VALUES $ 10,000,000 6.1920 6.1800 1.00% p.a. 3.00% p.a. Required: a) Do the market data indicate an opportunity for Thomas to conduct a covered interest arbitrage? Explain why. (3 marks) b) How should Thomas do the covered interest arbitrage? (3 marks) c) How much is Thomas' covered interest arbitrage profit? May use a diagram to show the specific steps and the corresponding cash flows. (6 marks)

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