Suppose that you are a foreign exchange trader for a bank based in New York. You are faced with the following market rates:
Spot exchange rate: SFr 0.9845/$.
6 month dollar interest rate = 1.0% per annum
6 month Swiss franc interest rate = 0.25% per annum
6 month forward exchange rate: = SFr 0.9785/$
a) Is there a Covered Interest Arbitrage (CIA) opportunity here? Explain why or why not.
b) Given the data in part (a), spell out the actions you would take to profit from this situation: Which currency would you borrow and which currency would you lend (invest)? What is the forward transaction you would engage in? What is the amount of arbitrage profits? Your response should include step-by-step verbal explanations as well as detailed calculations. pleasae explain every part.