Heidi Høi Jensen, 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. Assumptions Arbitrage funds available Spot exchange rate (kr/S) 3-month forward rate (kr/S) US dollar 3-month interest rate Danish kroner 3-month interest rate Value $5,000,000 6.1720 6.1980 4.000% a) 5.000% a) kr Equivalent kr 30,860,000 Heidi Høi Jensen generates a covered interest arbitrage profit because, although U.S. dollar interest rates are lower, the U.S. dollar is selling forward at a premium against the Danish krone. What is the amount of that profit? Okr21,102 C kr34,750 kr24,250 Okr54,150
Heidi Høi Jensen, 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. Assumptions Arbitrage funds available Spot exchange rate (kr/S) 3-month forward rate (kr/S) US dollar 3-month interest rate Danish kroner 3-month interest rate Value $5,000,000 6.1720 6.1980 4.000% a) 5.000% a) kr Equivalent kr 30,860,000 Heidi Høi Jensen generates a covered interest arbitrage profit because, although U.S. dollar interest rates are lower, the U.S. dollar is selling forward at a premium against the Danish krone. What is the amount of that profit? Okr21,102 C kr34,750 kr24,250 Okr54,150
ChapterP2: Part 2: Exchange Rate Behavior
Section: Chapter Questions
Problem 1Q
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Question
![Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency
equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark.
Assumptions
Arbitrage funds available
Spot exchange rate (kr/$)
3-month forward rate (kr/S)
US dollar 3-month interest rate
Danish kroner 3-month interest rate
Value
$5,000,000
6.1720
6.1980
4.000%
a)
5.000% a)
kr Equivalent
kr 30,860,000
Heidi Høi Jensen generates a covered interest arbitrage profit because, although U.S. dollar interest rates are lower,
the U.S. dollar is selling forward at a premium against the Danish krone. What is the amount of that profit?
kr21,102
kr34,750
kr24,250
kr54,150](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7858d89c-2f53-4700-9307-dd97274d2ae7%2Fb397f0ef-9fce-4bd9-9d22-c52b84ab3e9e%2Fztg2esm_processed.png&w=3840&q=75)
Transcribed Image Text:Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency
equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark.
Assumptions
Arbitrage funds available
Spot exchange rate (kr/$)
3-month forward rate (kr/S)
US dollar 3-month interest rate
Danish kroner 3-month interest rate
Value
$5,000,000
6.1720
6.1980
4.000%
a)
5.000% a)
kr Equivalent
kr 30,860,000
Heidi Høi Jensen generates a covered interest arbitrage profit because, although U.S. dollar interest rates are lower,
the U.S. dollar is selling forward at a premium against the Danish krone. What is the amount of that profit?
kr21,102
kr34,750
kr24,250
kr54,150
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