Question: Consider the prices of a U.S. dollar in the following currencies in a foreign-exchange market: Australian dollar (A$) = 1.35 and Swiss franc (CHF) = 0.90.

i) What characteristics does a foreign-exchange market possess? Name any two.

ii) What is the price of a Swiss franc in Australian dollars?

iii) Consider an Australian investor who is deciding between investing domestically (i.e. within Australia) or in Switzerland. The investor is only interested in the return his investment will yield in 12-months. If the domestic interest rate (iA$) is 0.08 and the interest rate in Switzerland (iCHF ) is 0.12, what is the value of a 12-month forward rate that will make the covered interest parity condition hold?

iv) Now suppose that the spot rate is as you calculated in part (ii) and the 12-month forward rate is as you calculated in part (iii). However, the interest rates in the two countries are now as follows: iA$ = 0:21 and iCHF = 0:30. In which country must the investor invest her money?