Kavita Raman is a foreign exchange trader for a bank in New York. She can borrow...

Kavita Raman is a foreign exchange trader for a bank in New York. She can borrow $1 million (or its Swiss franc equivalent) at her disposal for a short term money market investment. Kavita wonders whether she should make an uncovered interest arbitrage (UIA) transaction. She faces the following quotes:

Assumptions
Arbitrage funds available	$1,000,000
Spot exchange rate (SFr/$)	1.2810
3-month forward rate (SFr/$)	1.2740
U.S. dollar 3-month interest rate	4.800% per year
Swiss franc 3-month interest rate	3.200% per year

Which currency should she borrow, and how much is the payoff in terms of U.S. dollars in case of uncovered interest arbitrage (UIA) transaction?

		U.S. dollars; $1,538.46
		Swiss franc; $1,538.46
		U.S. dollars; $5,879.59
		Swiss franc; $5,879.59

Solutions

Expert Solution

jeff jeffy answered 1 week ago

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