The current dollar/Swiss franc spot exchange rate is 0.5685. If you invest one dollar for ninety days in the US domestic riskless asset, you earn $1.0101, and if you invest one franc for ninety days in the Swiss riskless asset, you earn 1.0113 francs (assume continuous
compounding). A broker offers you a ninety- day forward contract to buy or sell 1 million francs at the exchange rate of 0.55 dollars/franc. Are there arbitrage profi ts to be made here? If so, compute them.
SOLUTION
The data: