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5. Assume that annual interest rates are 9% in the United States and 6% in Switzerland. An FI can borrow (by issuing CDs) or lend

5. Assume that annual interest rates are 9% in the United States and 6% in Switzerland. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.60/Sf.

a. If the forward rate is $0.64/Sf, how could the bank arbitrage using a sum of $1 million? What is the spread earned?

b. What is the forward rate based on Interest Rate Parity?

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