Answered: 6) Lindsey Lohan is a foreign exchange…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 9CQ

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6) Lindsey Lohan is a foreign exchange trader for a bank in New York. She has $1 million (or its Swiss franc equivalent) for a short-term money market investment and she decides to seek the full 4.800% return available in US dollars by not covering her forward dollar receipts -- an uncovered interest arbitrage (UIA) transaction. Assess this decision. She faces the following quotes:

Assumptions Value Arbitrage funds available $1,000,000 Spot exchange rate (SFr./$) 1.2810 3-month forward rate (SFr./$) 1.2740 Expected spot rate in 90 days (SFr./$) 1.2700 U.S. dollar 3-month interest rate 4.800% Swiss franc3-month interest rate 3.200%

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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