Problem:
Casper Landsten-Thirty Days Later. One month after the events described in Problems 1 and 2. Casper Landsten once again has $1 million (or its Swiss franc equivalent) to invest for three months. He now faces the following rates. Should he again enter into a covered interest arbitrage (CIA) investment?
Arbitrage funds available $1,000,000
Spot exchange rate (SFr/$) 1.3392
3-month forward rate (SFr/$) 1.3286
U.S. dollar 3- month interest rate 4.750%
Swiss franc 3-month interest rate 3.625%
Problems-1
Casper Landsten-UIA (B). Casper Landsten, using the same values and assumptions as in Problem 12, decides to seek the full 4.800% return available in U.S. dollars by not covering his forward dollar receipts- an uncovered interest arbitrage (UIA) transaction. Assess this decision.
Problem-2
Casper Landsten-CIA (A). Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a shortterm money market investment and wonders whether he should invest in U.S. dollars for three months or make a CIA investment in the Swiss franc. He faces the following quotes:
Arbitrage funds available $1,000,000
Spot exchange rate (SFr/$) 1.2810
3-month forward rate (SFr/$) 1.2740
U.S. dollar 3- month interest rate 4.800%
Swiss franc 3-month interest rate 3.200%