Arbitrage opportunity in the currency markets

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A US investor sees an arbitrage opportunity in the currency markets. The spot exchange rate between the Swiss Franc and US Dollar is 1.00549 ($ per CHF). Assume the continuously compounded interest rates in the US and Switzerland are 0.33% and -0.81%, respectively. The 3-month currency forward price is 1.0107 ($ per CHF). What is the theoretically correct forward price? What is the investor’s total profit (in US$), assuming she begins by borrowing 100,000 US$?

Reference no: EM131044273

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