6.

Difference in interest rates = 5 – 3 = 2%

Spot−Forward 360 6.1720−6.1980 360

Forward discount on the krone = x x 100 = x x 100 = -
Forward 90 6.1980 90
1.678%

CIA profit potential = 0.322%

Heidi should borrows dollars and invest in the Danish Krone for CIA profit because the Danish
Krone is the higher yielding currency.

Borrow $5,000,000 at the US interest rate for 3 months. Convert into Kr at the spot exchange
rate. Kr received = 5,000,000 * 6.1720 = Kr 30,860,000

Invest Kr 30,860,000 at the Kr interest rate for 3 months. Kr received after 3 months = Kr
3
30,860,000 * (1 + (5% * )) = Kr 31,245,750
12

Convert Kr 31,245,750 into $ after 3 months. $ received after 3 months =  Kr 31,245,750/
6.1980 = $5,041,263.31

3
$ to repay the original loan = $5,000,000 * (1 + (3% * )) = $5,037,500
12

Arbitrage profit = $ received after 3 months - $ to repay after 3 months

= $5,041,263.31 - $5,037,500 = $3,763.31

6.10

Difference in interest rates = 5 – 4 = 1%

Spot−Forward 360 6.1720−6.1980 360

Forward discount on the krone = x x 100 = x x 100 = -
Forward 90 6.1980 90
1.678%

CIA profit potential = - 0.678%

Heidi should borrows Danish Krone and invest in the dollar because it is the lower interest rate
currency.
Borrow $5,000,000 at the US interest rate for 3 months. Convert into Kr at the spot exchange
rate. Kr received = 5,000,000 * 6.1720 = Kr 30,860,000

Invest Kr 30,860,000 at the Kr interest rate for 3 months. Kr received after 3 months = Kr
3
30,860,000 * (1 + (5% * )) = Kr 31,245,750
12

3
Total $ after 3 months = $5,000,000 * (1 + (4% * )) = $5,050,000
12

Kr received after 3 months =  Kr 5,050,000*6.1980 = $3,229,900

Arbitrage profit = Kr received after 3 months - Kr to repay after 3 months

= 31,299,900 - 31,245,750 = Kr 54,150

6.11

Difference in interest rates = 6 – 3 = 3%

Spot−Forward 360 6.1720−6.1980 360

Forward discount on the krone = x x 100 = x x 100 = -
Forward 90 6.1980 90
1.678%

CIA profit potential = 1.322%

Heidi should borrows US Dollars and invest in the Krone because it is the higher interest rate
currency.

Invest Kr 30,860,000 at the Kr interest rate for 3 months. Kr received after 3 months = Kr
3
30,860,000 * (1 + (6% * )) = Kr 31,322,900
12

Convert Kr 31,322,900 into $ after 3 months. $ received after 3 months =  Kr 31,322,900 /
6.1980 = $5,053,710.87

3
$ to repay the original loan = $5,000,000 * (1 + (3% * )) = $5,037,500
12

Arbitrage profit = $ received after 3 months - $ to repay after 3 months

= $5,053,710.87 - $5,037,500 = $16,210.87