Question

Casper​ Landsten-Thirty Days Later. Casper Landsten once again has ​$1.05 million​ (or its Swiss franc​ equivalent) to invest for three months. He now faces the following rates. Should he enter into a covered interest arbitrage​ (CIA) investment?

Arbitrage funds available	$	1,050,000
Spot exchange rate (SFr/$)		1.3394
3-month forward rate (SFr/$)		1.3283
U.S. Dollar annual interest rate		4.752	%
Swiss franc annual interest rate		3.625	%

The CIA profit potential is __ % (Round to 3 decimal places)

Answer 1

1. CIA Profit Potential = Difference in Interest Rates between Swiss and Us + Forward Premium

Difference in Interest Rates between Swiss and US = 3.625% - 4.752%

Difference in Interest Rates between Swiss and US = -1.127%

Forward Premium = (1 + (Difference in Exchange Rates / Spot Exchange Rate))^4 - 1

Forward Premium = (1 + (0.0111 / 1.3394))^4 - 1

Forward Premium = 3.36%

CIA Profit Potential = Difference in Interest Rates between Swiss and Us + Forward Premium

CIA Profit Potential = -1.127% + 3.356%

CIA Profit Potential = 2.229%