Suppose the spot rate for the dollar is .7102 USD/CHF. Swiss and U.S. interest rates are 7.6% and 5.2%, respectively. If the 1-year forward rate is .72 USD/CHF, an investor could earn an arbitrage profit per dollar invested of: A. USD 0.0000 B. USD 1.0908 C. USD 0.0388 The only problem I have is in determining the arbitrage opportunity. I use the IRP formula: (.7102)(1.052/1.076)=.694=the theoretically sound 1-year forward rate. Now how do I decide whether to lend at US and borrow at CHF or lend at CHF and borrow at US?
Use this: (1+rd) > ((1+rf)(F))/(So); Borrow Foreign…if you change it to "
Is the forward currency in DC/FC as well? This is a great formula; Schweser doesn’t have this I don’t think.
shows up in all answers to such questions on schweser qbank.