Covered interest arbitrage in annualized terms

Reference no: EM13116339

Mary Joe has a credit line of $1,000,000 (or equivalent in major currencies) for arbitrage. She had access to the following rates, and she managed to generate CIA profits. Replicate her arbitrage and calculate her profits based on the following rates:

Assumptions

Value

SFr. Equivalent

Arbitrage funds available

$1,000,000

SFr. 1,281,000

Spot exchange rate (SFr./$)

1.2810

3-month forward rate (SFr./$)

1.2740

U.S. dollar 3-month interest rate

4.800%

Swiss franc3-month interest rate

3.200%

Note that interest rates are expressed in annualized terms!

A. $1,538.46

B. SFr 1,538.46

C. $1936.44

D. SFr 1936.44

Reference no: EM13116339

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