The treasurer of a middle market, import$-$export company has approached you for advice on how to best invest some of the firm$$s short$-$term cash balances. The company, which has been a client of the bank that employs you for a few years, has $$250,000$ that it is able to commit for a one$-$year holding period. The treasurer is currently considering two alternatives: $(1)$ invest all the funds in a one$-$year U$.$S$.$ Treasury bill offering a bond equivalent yield of $4\mathrm{.}30\%,$ and $(2)$ invest all the funds in a Swiss government security over the same horizon, locking in the spot and forward currency exchanges in the FX market. A quick call to the bank$$s FX desk gives you the following two$-$way currency exchange quotes.

Swiss Francs per U$.$S$.$ Dollar per

U$.$S$.$ Dollar Swiss Franc $($CHF$)$

Spot $1\mathrm{.}47580\mathrm{.}6776$

$1-$year CHF futures $0\mathrm{.}6684$

Calculate the one$-$year bond equivalent yield for the Swiss government security that would support the interest rate parity condition. Do not round intermediate calculations. Round your answer to two decimal places.

$\%$

Assuming the actual yield on a one$-$year Swiss government bond is $6\mathrm{.}00\%,$ which strategy would leave the treasurer with the greatest return after one year? Do not round intermediate calculations. Round your answer to two decimal places.

The one$-$year bond equivalent yield for the U$.$S$.$ Treasury bill is

$\%.$ So$,$ investing in a one$-$year

$-$Select$-$

is more profitable than investing in

$-$Select$-$

$.$

Describe the transactions that an arbitrageur could use to take advantage of this apparent mispricing.

An arbitrageur could borrow $$250,000$ domestically at $4\mathrm{.}30\%,$ convert it into CHF$,$ buy Swiss government bonds, and enter into a forward contract to reconvert the proceeds after a year. After a year the sum invested in Swiss government bonds at $6\mathrm{.}00\%$ could be converted back into dollars at the forward rate of $0\mathrm{.}6684$ $$/$CHF$.$ Then the arbitrageur should repay the loan plus interest. So$,$ net profit could be collected.

An arbitrageur could borrow $369,000$ CHF in Switzerland at $6\mathrm{.}00\%,$ convert it into dollars, buy U$.$S$.$ Treasury bills, and enter into a forward contract to reconvert the proceeds after a year. After a year the sum invested in U$.$S$.$ Treasury bills at $4\mathrm{.}30\%$ could be converted back into CHF at the forward rate of $1\mathrm{.}4961$ CHF$/$$$.$ Then the arbitrageur should repay the loan plus interest. So$,$ net profit could be collected.

An arbitrageur could borrow $$250,000$ domestically at $4\mathrm{.}30\%,$ convert it into CHF$,$ buy Swiss government bonds, and enter into a forward contract to reconvert the proceeds after a year. After a year the sum invested in Swiss government bonds at $5\mathrm{.}64\%$ could be converted back into dollars at the forward rate of $0\mathrm{.}6684$ $$/$CHF$.$ Then the arbitrageur should repay the loan plus interest. So$,$ net profit could be collected.

An arbitrageur could borrow $369,000$ CHF in Switzerland at $6\mathrm{.}00\%,$ convert it into dollars, buy U$.$S$.$ Treasury bills, and enter into a forward contract to reconvert the proceeds after a year. After a year the sum invested in U$.$S$.$ Treasury bills at $4\mathrm{.}46\%$ could be converted back into CHF at the forward rate of $1\mathrm{.}4961$ CHF$/$$$.$ Then the arbitrageur should repay the loan plus interest. So$,$ net profit could be collected.

$-$Select$-$

Calculate what the profit would be for a $$250,000$ transaction. Do not round intermediate calculations. Round your answer to the nearest cent. Use only the exchange rates provided in the table above $($in the problem statement$)$ for your calculations.

$