Question
I am a little behind, please some work, will give thumbs up Suppose a German investor is considering to save 100 Euro in a bank
I am a little behind, please some work, will give thumbs up
Suppose a German investor is considering to save 100 Euro in a bank deposit. She can choose between saving it either in a bank in Germany or in Switzerland. The (annual) interest rate on bank deposits is 4% in Germany and 5% in Switzerland. The spot rate at the time is 0.89 euro per Swiss franc. Meanwhile the (one-year) forward rate is 0.95 euro per Swiss franc. In answering the following questions, show your calculation and use the formula properly. a) What is the euro-denominated return on German desposits for this investor? b) What is the (riskless) euro-denominated return on Swiss deposits for the investor if she uses the forward cover?
c) Is there a riskless arbitrage opportunity here? Is the current condition an equilibrium in the forward exchange rate market? d) If CIP holds and the spot rate is 0.89 euro, what is the implied true equilibrium forward rate? e) If CIP holds as in (d) and UIP also holds, what is the expected depreciation of the euro against the swiss franc over one year?
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