What is the exchange rate risk that jack is taking

Assignment Help Financial Management

Reference no: EM131958099

Jack is a foreign exchange trader for a bank in New York. He has $1 million (or Swiss franc equivalent) available to borrow and will then invest it in a short term money market investment.

He is wondering whether he can make a CIA or UIA profit by borrowing in either the U.S. dollar or Swiss franc, and then investing in the other.

He has the following data:

arbitrage funds available $1,000,000

spot exchange rate (SFr/$) 1.2810

3-month forward rate (SFr/$) 1.2740

expected spot rate in 90 days 1.2700

U.S. dollar 3-month interest rate 4.800% per annum

Swiss franc 3-month interest rate 3.200% per annum

1. Assess whether CIA profit is possible. Is there a CIA profit potential; if yes, what is it? Show your work. Which currency should Jack borrow in and which should he invest in? Why?

2. Given your conclusions for question 1, show how Jack can make profit (i.e. show how and what numbers you get for how much he would owe on borrowing in the one currency and how much he would make in investing in the other currency).

3. What is the exchange rate risk that Jack is taking by engaging in CIA?

Reference no: EM131958099

Questions Cloud

Describe lockout-tagout procedures : 1. Describe lockout/tagout procedures 2. List and describe the 7 "principles of learning"

Development of a data warehouse : Discuss at least two issues associated with the development of a data warehouse

Main reasons for implementing a data mart : Discuss the concept of a data mart and the main reasons for implementing a data mart. Provide an example of a data mart for example for a bank or a retailor

Extinguisher beside on the wall : You see a Class A extinguisher beside him on the wall. How would you go forward? Approach this scenario as a hazmat technician.

What is the exchange rate risk that jack is taking : Assess whether CIA profit is possible. Is there a CIA profit potential; if yes, what is it? Show your work.

True about intraperiod compounding : Which of the following sentences is NOT true about (or related to) intraperiod compounding?

What are the differences medicare and medicaid : What are the differences Medicare and Medicaid. It needs to include information regarding federal and state laws governing the two different types of insurance

Eight dimensions that could affect relationship : What are they list eight dimensions that could affect this relationship. Which do you think your organization can improve upon in order to stimulate creativity?

What is tha equivalent cost per mile : A company is currently paying its employees $0.25 per mile to driv their own cars when on company business The company is considering supplying employees.

User Account

All Pages