Question

Copenhagen Covered​ (B). Heidi​ Høi Jensen, a foreign exchange trader at J.P. Morgan​ Chase, can invest ​$5 ​million, or the foreign currency equivalent of the​ bank's short term​ funds, in a covered interest arbitrage with Denmark. She is now evaluating the arbitrage profit potential in the same market after interest rates change.​ (Note that anytime the difference in interest rates does not exactly equal the forward​ premium, it must be possible to make CIA profit one way or​ another.)

Arbitrage funds available $ 5,000,000

Spot exchange rate (kr/$) 6.1720

3-month forward rate (kr/$) 6.1980

U.S. dollar annual interest rate 4.000 %

Danish krone annual interest rate 5.000 %

A. The CIA profit potential is -0.678% and Heidid should borrow Danish krone and invest in the lower rate currency, the dollar.

B. The CIA profit amount is kr___

I figured out A but I need help solving B. Thank you.

Answer 1

	So the funds available are invested in dollar
	Equivelent Danish Krone	=5000000*6.172
		30,860,000
	Amount payable in Danish after 3 months	=30860000*(1+(5%*3/12))
		31,245,750
	This is invested in USD so amount after 3 months	=5000000*(1+(4%*3/12))
		5,050,000
	Amount converted back to Danish Krone	=5,050,000*6.198
		31,299,900
	So this way there will be Gain	54,150