Question

You have the following market data.

• Spot price for the Swiss Franc is $1.198 per Franc.
• Two-month forward price is $1.247 per Franc.
• U.S. dollar LIBOR for two months is a continously compounded rate of 2.92% per annum.
• Swiss LIBOR for two months is a continuously compounded rate of 2.32% per annum.
• Underlying asset for this contract (i.e., the quantity of Swiss Francs to be delivered in two months) is 500,000 Swiss Francs.

What is the total net profit if you execute the arbitrage strategy?

Do not round values at intermediate steps in your calculations. Enter your answer in dollars and cents to two decimal places, but omit the $ symbol and commas. For example, enter $1,234.56 as 1234.56 as your answer.

Answer 1

A	B	C	D	E	F	G
2
3		Arbitrage funds available in Swiss Franc	500,000.00
4		Spot Exchange Rate	1.198	$/Franc
5		Forward rate (2 months later)	1.247	$/Franc
6		US Dollar interest rate	2.92%
7		Swiss interest rate	2.32%
8		Period	2	Month
9		Strategy I (Borrow in Franc and lend in $)
10
11		Fund Available	500,000.00	Franc
12		Borrow in Franc	500,000.00	=D11
13		Convert it to $	$599,000.00	=D12*D4
14
15		Lend in $	$599,000.00	=D13
16		Total amount after 2 month	$601,922.24	=D13*EXP(D6*(D8/12))
17
18		Convert that amount at forward rate to Franc	482,696.26	=D16/D5
19
20		Amount in Franc to be paid back to Lender	501,937.08	=D12*EXP(D7*(D8/12))
21
22		Arbitrage Profit in Franc	-19,240.81	=D18-D20
23		Arbitrage Profit in $	($15,429.68)	=D22/D5
24
25
26		Strategy II (Borrow in $ lend in Franc)
27		Fund Available	500,000.00	Franc
28		Borrow in $	$599,000.00	=D27*D4
29		Convert it to Franc at spot rate	500,000.00	=D28/D4
30
31		Lend in Franc	500,000.00	=D29
32		Total amount after 2 month	501,937.08	=D29*EXP(D7*(D8/12))
33
34		Convert that amount at forward rate to $	$625,915.53	=D32*D5
35
36		Amount in $ to be paid back to lender	$601,922.24	=D28*EXP(D6*(D8/12))
37
38		Arbitrage Profit in $	$23,993.30	=D34-D36
39
40		Thus borrowing in Dollar and Lending in FRANC results into the arbitrage profit of	$23,993.30
41