Hi guys,

I have been banging my head against the wall on this for literally hours and any feedback someone could provide would be more than appreciated.

Example 6 reading 48 spot rate swiss franc is $0.60, US interest rate is 6%, Swiss interest rate is 5%, futures contract expires in 78 days. If you caclulate the futures price it is $0.6012, the futures price quotes in the market is $0.62, and we are asked to execute an arbitrage transaction.

The futures price is too high so as I understand it we need to sell the futures, borrow risk free rate and buy the underlying.

My solution does not marry up with the text book solution so I was hoping someone could please tell me where my logic is wrong.

In caculating the return for dollar invested I think I should borrow Swiss Franc as it is cheaper at 5%, buy underlying at $0.60 — puting it to work at US risk free rate of 6.2%… And then sell the futures…

The textbook has a strange way of solving this question - I was wondering how people on here have managed to cacluate the solution to this one, because I’m getting nowhere… Thanks