Design an arbitrage strategy to exploit the lack of IRP

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Reference no: EM132050742

Assume that annual interest rates are 9% in the United States and 6% in Switzerland. A bank can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.60/Sf.

(a) If the current 1Y FX forward rate is $0.64/Sf, does the interest rate parity (IRP) hold?

(b) Based on your answer in (a), design an arbitrage strategy to exploit the lack of IRP. Assuming an arbitrage position of $1 million, what are the profit and spread earned?

(d) If the current 1Y forward rate is $0.58/Sf instead, design an arbitrate strategy to exploit the lack of IRP. Assuming an arbitrage position of Sf 1 million, what are the profit and spread earned?

Reference no: EM132050742

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