Mary Smyth is a foreign exchange dealer for a bank in New York City. She has $1,000,000 for a short-term money market investment and wonders if she can execute a covered interest arbitrage investment in the Swiss Franc. She face the following rates:
Spot exchange rate: SF1.1520/$
3-month forward rate: SF1.1472/$ 3-month
U.S. interest rate: 4.5% per annum (1.125% quarterly)
3-month Swiss interest rate: 3.2% per annum (0.8% quarterly)
a. Is there a covered interest arbitrage opportunity?
b. What would be the total amount of Swiss francs (principal plus interest) in her Swiss bank account after 3-month deposit period?
c. What would be her final total US dollar amount?