Jason is a foreign exchange trader for a bank in New York. He can borrow $1 million or Sfr 1,402,000 for a short term money market investment and wonders if he should invest in U.S. dollars for three months, or invest in Swiss franc. He faces the following quotes:
Assumptions
Value
Arbitrage funds available $1,000,000 or Sfr 1,402,000
Spot exchange rate (SFr./$) 1.4020
3-month forward rate (SFr./$) 1.3500
U.S. dollar 3-month interest rate (p.a.) 4.80%
Swiss franc3-month interest rate (p.a.) 4.40%
How much money can Jason make using Covered Interest Parity (CIP)? First, you must show whether you invest in US or in Switzerland.