Question

Casper Landsten-UIA (B). Casper Landsten is a foreign exchange trader for a bank in New York. Using the values and assumptions below, he decides to seek the full 4.803% return available in U.S. dollars by not covering his forward dollar receipts—an uncovered interest arbitrage (UIA) transaction. Assess this decision. $ 900,000 1.2811 Arbitrage funds available Spot exchange rate (SFr/$) 3-month forward rate (SFr/$) Expected spot rate in 90 days (SFr/$) U.S. Dollar annual interest rate 1.2737 1.2695 4.803 % 3.198 % Swiss franc annualinterest rate The uncovered interest arbitrage (UIA) profit amount is $ (Round to the nearest cent.)

Answer 1

1.2811 1.2737 Spot exchange rate S(SF/S) = 3 month forward rate = Expected spot rate in 90 days (SF/S) = US Dollar annual interest rate = Swiss Franc annualized rate = 1.2695 4.803% 3.198% Uncovered interest arbitrage (UIA) Borrow $900,000 at annualized return of 4.803% Convert $900,000 to Swiss Franc at spot exchange rate of 1.2811, you will get 900,000*1.2811 = 1152990.00 swiss franc Invest these swiss franc at an annualized rate of 3.198% and at the end of 3-months receive 1152990*(1+3.198%/4) = 1162208.16 swiss franc Convert these swiss franc to US dollar at Expected spot rate of SF1.2695/$ You'll get $ 915,484.96 Now, pay back the borrowed amount in $, 900000*(1+4.803%) = 910806.8 You are left with profit of $ 4,678.21