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

  1. 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
  1. 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 5 months ago
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