The spot exchange rate between the US dollar and Swiss franc is $1.056 per franc. Swiss banks
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Question:
The spot exchange rate between the US dollar and Swiss franc is $1.056 per franc. Swiss banks pay 2.5 percent (annual) interest on their 180-day (6 months) deposits. On similar deposits, American banks pay 1.5 percent (annual.) Assuming that the 180-day forward rate of Swiss franc is $1.045,
- Do you see an arbitrage opportunity between these two countries? Briefly explain.
- If your answer were yes, how you would be able to take advantage from it and how much you would make on $100,000 investment?
- The arbitrage transactions are expected to be followed by some adjustments in the market which will eventually make the arbitrage opportunity disappear. What kind of adjustment do you expect to see in each of the following?
- The US interest rate
- The spot exchange rate between the dollar and the Swiss franc
- The 6-month forward rate between the dollar and the Swiss franc
- The Swiss interest rate
Related Book For
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair
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