Question
b) The spot exchange rate between Swiss franc (CHF) and the euro (EUR) is 1.04 CHF/EUR. The interest rates in the Eurozone and Switzerland are
b) The spot exchange rate between Swiss franc (CHF) and the euro (EUR) is 1.04 CHF/EUR. The interest rates in the Eurozone and Switzerland are 1% and 3%, respectively, with continuous compounding. The 9-month forward exchange rate is 1.02 CHF/EUR. Base your answer on 1,000 units of EUR. i. Create the arbitrage portfolio and calculate the profit/loss from the arbitrage strategy ii. What changes if the forward exchange rate is 1.08 CHF/EUR? Present the calculations in detail. c) Explain why the arguments leading to putcall parity for European options cannot be used to give a similar result for American options. Present the equivalent of the put-call parity for American options.
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