Uncovered Interest Arbitrage You are an investment manager in Switzerland. You see different interest rates around the world and your exchange trading team (as always staffed by Stern alums) has provided you with the current spot rate and an expected future spot rate for Japan and Swiss currencies. *Current spot exchange rate is 115 Japanese Yen per Swiss Franc (it really is if you are curious to look it up later) *The 1 year interest rate on the Japanese Yen-denominated bank deposit is 9% *The 1 year interest rate on the Swiss Franc-denominated bank deposit is 5% *Expected future spot rate in 120 days is 118 Japanese Yen per Swiss Franc Where will you earn the higher rate of return - Japan or Switzerland? (2pts) Switzerland Roughly speaking (we allow for rounding errors): If you invested 2 billion Swiss Franc into a Japanese bank and then returned it using this expected future spot rate and assuming it turned out to be accurate, how much more money would our firm make or lose in Japan than Switzerland (be sure to note if this was a gain or loss)? (3pts) Lose 0.025 (accept rounding errors)