The following information has been extracted from a bank based on New York and the...
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Finance
The following information has been extracted from a bank based on New York and the central banks of USA and Switzerland.
Spot exchange rate
SFr1.2251/$
Six-month forward exchange rate
SFr1.1922/$
Six-month $ interest rate
2.25% per year
Six-month SFr interest rate
2.15% per year
Given the information, answer the following:
a. Evaluate whether interest rate parity holds or not. Please ignore transaction cost [2 Mark].
b. Is there any covered interest arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that You start with $500,000, compute the percentage of arbitrage profit in dollars .[8 Marks]
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