Question
One year borrowing and deposit interest rates are 13% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Switzerland. Assume that the
One year borrowing and deposit interest rates are 13% and 10.5% respectively in
the US and 10.5% and 8.5% respectively in Switzerland. Assume that the spot
exchange rate for the US dollars is $7 to the Swiss Francs. The 12-month forward
rate is $7.2.
i) Suggest a way you might profit from the pricing inconsistency that is
presented here, assuming you have no initial investment funds.
ii) Will the situation persist forever? Explain your answer.
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Derivatives Markets
Authors: Robert McDonald
3rd Edition
978-9332536746, 9789332536746
