Kavita Raman is a foreign exchange trader for a bank in New
York. She can borrow...
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Finance
Kavita Raman is a foreign exchange trader for a bank in NewYork. She can borrow $1 million (or its Swiss franc equivalent) ather disposal for a short term money market investment. Kavitawonders 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 interms 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
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