1. The following bid and offer spot and 3-month forward exchange rates are shown for the Switzerland franc (CHF) against the U.S. dollar (USD).

Bid Offer Mid

SPOT CHF 1.45/USD CHF 1.47/USD CHF 1.46/USD

3-mo forward CHF 1.41/USD CHF 1.43/USD CHF 1.42/USD

Also, the following offer and bid bank annualized interest rate, based on 3-month maturities, are shown for the CHF and USD.

Annualized

(in decimals)

Deposit Rate Borrowing Rate Mid

Swiss Franc 0.045 0.050 0.0475

U.S. Dollar 0.050 0.055 0.0525

• Show the self-financing riskless covered interest arbitrage thats possible in this market, starting the analysis by borrowing 1 million units of the currency to be borrowed. (Determine which currency to borrow by examining the relationship between the mid spot and forward exchange rates and the interest rates)
• In two sentences or less intuitively describe interest rate parity theorem.