Question 4. (a) Jade Smith is a foreign exchange trader for a bank in New York. He has $1 million for a short-term money market investment and he faces the following quotes: (Assuming there are 360 days a year) Spot exchange rate (SFr/$) 1.2810 3-month forward rate (SFr/$) 1.2740 US dollar annual interest rate 4.8% Swiss franc annual interest rate 3.2% He wonders whether he should invest in US dollars for 90 days or make a covered interest arbitrage (CIA) investment in the swiss franc, and what is the profit/loss if he carries out this investment.

(b) Using the same values in the table above, Jade decides to seek the full 4.8% return available in the US dollars by not covering his forward dollar receipts an uncovered interest arbitrage (UIA) transaction. What is the maximum expected spot exchange rate (SFr/$) at the end of the 90-day period at which Jade can avoid losing money? (6 Marks)