Question

Copenhagen Covered​ (B). Heidi​ Høi Jensen, a foreign exchange trader at J.P. Morgan​ Chase, can invest

​$4.9

​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	$	4,900,000
Spot exchange rate (kr/$)		6.1724
3-month forward rate (kr/$)		6.1982
U.S. dollar annual interest rate		3.900	%
Danish krone annual interest rate		5.000	%

Answer 1

Amount available for Investment =$4900000

Spot exchange rate= Kr6.1724/$

Hence, converting $ into Kr will give = 4900000* 6.1724=Kr 3,02,44,760
Interest earned = Kr 3,02,44,760*5%*3/12= Kr 3,78,060
Total amount avilable now= Kr 3,02,44,760 + Kr 3,78,060 = Kr 3,06,22,820

The Trader will then cover it via forward rate of Kr 6.1982/$
which gives Kr 3,06,22,820 /6.1982 = $49,40,599
Profit= 4940599-4900000= $40,599

If not converted into Danish Krone, he would have earned 4900000*3.9%*3/12=$ 47,775
Hence, Covered Interest Arbitrage is not viable.