Ignoring transaction costs-is interest rate parity holding

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Reference no: EM131979252

Jason Smith is a foreign exchange trader with Citibank. He notices the following quotes.

Spot exchange rate SFr 1.6527/$

Six-month forward exchange rate SFr 1.6458/$

Six-month $ interest rate 3.6% per year

Six-month SFr interest rate 3.0% per year

a. Ignoring transaction costs, is the interest rate parity holding?

b. Is there an arbitrage possibility? If yes, what steps would be needed to make an arbitrage profit? Assuming that Jason Smith is authorized to work with $1,000,000 for this purpose, how much would the arbitrage profit be in dollars?

Reference no: EM131979252

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