ECONOMICS - international trade

1. Covered interest arbitrage A one-year bond denominated in Swiss Francs (CHF) earns an interest rate of 5% per year. A one year bond denominated in f earns 4.5% per year and the exchange rate is CHF1.299512/f. Assume that an investor can hedge on the forward market and that the 90-day forward exchange rate is CHF1.3003/f. a. Calculate the forward discount on the CHF with respect to the pound as a percentage on a yearly basis (include the sign). b. Is the CHF at a forward discount or at a forward premium with respect to the pound? c. What is the annual return of a Swiss Franc invested in the UK (iUK+FD)? In which direction will capital flow? Switzerland to UK OR UK to Switzerland d. Calculate (in # of CHF) his return on the CHF1,000 invested for 90 days (i.e. the amount of CHF he will receive above his original CHF1,000 by investing in the most profitable alternative whether CHF or f)