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Carla Heinz is a portfolio manager for Deutsche Bank. She is considering two alternative investments of EUR10,000,000: 180-day euro deposits or 180-day Swiss franc (CHF)

Carla Heinz is a portfolio manager for Deutsche Bank. She is considering two alternative investments of EUR10,000,000: 180-day euro deposits or 180-day Swiss franc (CHF) deposits. She has decided not to bear transaction foreign exchange risk. Suppose she has the following data: 180- day CHF interest rate of 8% p.a.; 180-day EUR interest rate of 10% p.a.; spot rate of EUR1.1960> CHF; and 180-day forward rate of EUR1.2024>CHF.

Which of these deposits provides the higher euro return in 180 days?

If these were actually market prices, what would you expect to happen?

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