Ch04_SSol - Problem 4.5 Danish CIA (A) Assumptions Value...

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Unformatted text preview: Problem 4.5 Danish CIA (A) Assumptions Value Arbitrage funds available $5,000,000 Spot exchange rate (kr/$) 6.1720 3-month forward rate (kr/$) 6.1980 US dollar 3-month interest rate 3.000% Danish kroner 3-month interest rate 5.000% Difference in interest rates (ikr - i$) 2.000% Forward discount on the krone-1.678% CIA profit potential 0.322% U.S. dollar interest rate (3-month) START 3.000% END $5,000,000.00 1.0075 $5,037,500.00 5,041,263.31 $3,763.31 Spot (kr/$)---------------> 90 days ----------------> Forward-90 (kr/$) 6.1720 6.1980 kr 30,860,000.00 1.0125 kr 31,245,750.00 5.000% Danish kroner interest (3-month) Steve Shi, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. He has the following quotes: Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount, or expected...
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Ch04_SSol - Problem 4.5 Danish CIA (A) Assumptions Value...

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