A Swiss investor has purchased a US Treasury bond priced at 100. Its yield is 4.5 percent and the investor expects US yields to move down by 15 basis points over the year. The modified duration of the bond is 6. The Swiss franc money market rate is 1 percent adn the dollar money market rate is 2 percent. The one year forward rate is Sfr 1.4600/$ .

a. The Swiss investor has come up with his own model to forecast the SFr/$ exchange rate one year ahead. This model forecsts the one-year ahead exchange rate to be SFr 1.35/$ . Based on this forecast, should the Swiss investor hedge the currency risk of his investment using a forward contract?

b. If the Swiss investor decides to hedge using a forward contract, gie a rough estimate of his expected return.

c. Verify for the hedged investment that the risk premium in Swiss francs is the same as the risk premium on the same US Treasury bond for a US investor