Question

1. Assume the following information:​

1-year deposit rate offered by U.S. banks	=	12%
1-year deposit rate offered on Swiss francs	=	10%
1-year forward rate of Swiss francs	=	$.62
Spot rate of Swiss franc	=	$.60

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1. An U.S. investor has $1,000,000 to invest (note: the investor uses own money, not borrowed funds). What is the yield to the U.S. investor who conducts covered interest arbitrage? Make sure you show your works step by step and explain your calculations. Does covered interest arbitrage work for the U.S. investor?

2. A Swiss investor have Swiss francs (CHF) 1,000,000 to execute covered interest arbitrage (i.e., convert CHF into US$, invest in the U.S., and use forward contracts to hedge foreign exchange rate risk). What is the yield to the Swiss investor who conducts covered interest arbitrage? Can the Swiss investor earns a higher return than investing at home (i.e., Switzerland)? (6 points in total)

Answer 1

ANSWER IN THE IMAGE((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

1. American investors can earn.