In January 2012 the Federal Reserve Bank of America quoted the Swiss Franc (SF) vis-a-vis the dollar at a rate of SF3 = $1, and its research department forecasted that by the end of the year the price level in the United States would have risen by 10% while that of Switzerland would rise by 5%. The real rate of interest in both countries is 4%.Postulate that the nominal interest rates in Switzerland and the USA are 8% and 15% respectively, and the one year forward rate of the SF is SF2.8725 to the dollar. Show how a Swiss investor who has an overdraft line of SF900 000 can make riskless profits through covered interest arbitrage. Comment on what would happen to both interest and exchange rates in the two countries as more investors move in to take advantage of these profitable opportunities