One year borrowing and deposit interest rates are 13% and 10.5% respectively in the US and 10.5%
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Question:
One year borrowing and deposit interest rates are 13% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Switzerland. Assume that the spot exchange rate for the US dollars is $7 to the Swiss Francs. The 12-month forward rate is $7.2.
i) Suggest a way you might profit from the pricing inconsistency that is presented here, assuming you have no initial investment funds.
ii) Will the situation persist forever? Explain your answer.
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