Lou Peters is a foreign exchange trader for a bank in New York. He has $1 million (or its

Swiss franc equivalent) for a short-term money market investment and wonders if he should

invest in U.S. dollars for three months, or make a covered interest arbitrage investment in

the Swiss franc. He faces the following quotes:

Spot exchange rate SF 1.3269/$

Three-month forward rate SF 1.3017/$

U.S. three-month interest rate 5.630 % per annum

Swiss three-month interest rate 4.250 % per annum

1) Calculate forward premium (or discount)? Following the rule of thumb, should Lou invest in U.S. dollars for three months, or make a covered interest arbitrage investment in the Swiss franc.?

2) Where do you recommend Lou invests, and why?

3) What is Lou rate of return, on an annual basis, on this covered interest arbitrage investment?

Can the answer be shown in excel so that I can have a better understanding of the topic, thanks.