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Ferd Rumpledink, a foreign exchange trader at UBS Bank, is exploring covered interest arbitrage opportunities. He has 10,000,000 USD (or the CHF equivalent at the current spot rate) to invest and is considering a 180 day investment. Assume he already has the funds and does not need to borrow them. He has observed the following exchange rate and interest rate quotes (exchange rates are in currency pairs notation):
Spot rate (CHF/USD) 1.1861
180-day forward rate (CHF/USD) (not annualized) 1.1812
180-day U.S. dollar interest rate (annualized) 5.200%
180-day Swiss Franc interest rate (annualized) 6.100%
Can Ferd make an arbitrage profit on this situation? If so, should he invest USD or CHF? Show your work on a block diagram like the ones we used in class for covered interest arbitrage. (Remember that interest rates are quoted as annual, but your investment period is 180 days.)
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