Assume you are the treasurer of a multinational company based in Switzerland. Your company trades extensively with the United States. You have just received US$1 million from a customer in the United States. As the company has no immediate need of capital, you decide to invest the money in either US$ or Swiss francs for 12 months. The following information is relevant:

The spot rate of exchange is CHF1.3125 to US$1.

The 12-month forward rate is CHF1.275 to US$1.

The interest rate on a 1-year Swiss franc bond is 49

⁄16 per cent.

The interest rate on a 1-year US$ bond is 7⅝ per cent.

Assume investment in either currency is risk-free and ignore transaction costs.

Required Calculate the returns under both options (investing in US$ or Swiss francs) and explain why there is so little difference between the two figures.
Your answer may be expressed either in US$ or in Swiss francs.
(CIMA May 1998)