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If the current 1-year risk free rate in US is 6%, the current 1-year risk free...

If the current 1-year risk free rate in US is 6%, the current 1-year risk free rate in Switzerland (currency symbol: CHF) is 9%, and the current spot rate between USD and CHF is CHF 1.2550/USD.

(1) If interest rate parity holds, what should be the appropriate one year forward rate?   

(2) You find out the actual quote from your bank on the one year forward contract is CHF 1.2850 /USD, what would be your covered interest arbitrage profits if you can borrow USD $1,000,000 in US at the risk free rate? To get full credits, you need to include step by step instructions on how to carry out this strategy.

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jeff jeffy answered 2 years ago
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