Heidi Høi Jensen, a foreign exchange trader at JPMorgan Chase, can

invest $5 million, or the foreign currency equivalent of the bank’s short-

term funds, in a covered interest arbitrage with Denmark. Using the
following quotes, can Heidi make a covered interest arbitrage (CIA)
profit?

Arbitrage funds available………………….$5,000,000

Spot exchange rate (kr/$)………………………6.1720
3-month forward rate (kr/$)……………………6.1980
U.S. dollar 3-month interest rate……………...3.000%
Danish kroner 3-month interest rate………….5.000%
 Given Data Value
Arbitrage funds available $10,000,000
Spot exchange rate (kr/$) 6.1920
3-month forward rate (kr/$) 6.1800
US dollar 3-month interest rate 1.000%
Danish kroner 3-month interest rate 3.000%

Difference in interest rates (ikr - i$) 2.000%

Forward discount on the krone 0.777%
CIA profit potential 2.777%

U.S. dollar interest rate (3-month)

START 1.000%

$ 10,000,000.00 → → 1.0025 → →
↓
↓
↓
↓
↓
Spot (kr/$) ---------------> 90 days ---------------->
6.1920
↓
↓
↓
kr 61,920,000.00 → → 1.0075 → →

3.000%
Danish kroner interest (3-month)

Heidi Høi Jensen generates a covered interest arbitrage (CIA) profit because she is able to generate an even
interest return in Danish kroner than she "gives up" by selling the proceeds forward at the forward rate.
 END

$ 10,025,000.00
10,094,563.11
$ 69,563.11
↑
↑
↑
Forward-90 (kr/$)
6.1800
↑
↑
↑
kr 62,384,400.00

able to generate an even higher

d at the forward rate.