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Covered Interest Arbitrage in Annualized Terms

Mary Joe has a credit line of $1,000,000 (or equivalent in major currencies) for arbitrage. She had access to the following rates, and she managed to generate CIA profits. Replicate her arbitrage and calculate her profits based on the following rates:
Assumptions
Value
SFr. Equivalent
Arbitrage funds available
$1,000,000
SFr. 1,281,000
Spot exchange rate (SFr./$)
1.2810
3-month forward rate (SFr./$)
1.2740
U.S. dollar 3-month interest rate
4.800%
pa
Swiss franc3-month interest rate
3.200%
pa

Note that interest rates are expressed in annualized terms!
A. $1,538.46
B. SFr 1,538.46
C. $1936.44
D. SFr 1936.44

Solution Summary

The solution solves a covered interest arbitrage question with step-by-step workings and explanations in an excel file.

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