Exercise 3. CIP, UIP and the Swiss Central Bank [25 points] Suppose that the spot EuroSwiss Franc exchange rate is 1.06 Swiss Francs per Euro, and that the oneyear forward rate is 1.04 Swiss Francs per Euro. Suppose also that the one year interest rates of a localcurrency deposit in Gelmany and Switzerland are the same. [a] [15 points] Does covered interest rate parity hold? If not, describe in detail an invest ment strategy that would yield prots without requiring any initial capital. Now suppose that there are no forward contracts but interest rates are still equal to each other. Assume nther that there is a new President of the Swiss Central Bank to be appointed next month, and that there are two candidates, A and B. Candidate A announced that she will depreciate the Franc relative to the Euro by 40%, if she gets appointed. Candidate A announced that he will appreciate the Franc relative to the Euro by 20%, if he gets appointed. {b} [10 points] [i UIP holds, what is the probability that the markets assign to candidate A being appointed