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Suppose the following interest rates (one year bonds) for Switzerland and the EU: i( SWI) = 4%, and i( EU) = 6%. The Swiss franc

Suppose the following interest rates (one year bonds) for Switzerland and the EU: i(_SWI) = 4%, and i(_EU) = 6%. The Swiss franc (currency of Switzerland) per euro (currency of EU) one year forward exchange rate is 1.10 and the current spot rate is 1.08. Does interest parity hold? If not, illustrate and describe the economic forces (supply and demand in markets) that drive a return to interest parity.

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