You work currencies on the trading desk at UBS in Zurich and you're considering investing in either the CHF$-$EUR or the CHF$-$USD carry trades. Your borrowing limit is CHF $10$ Billion.

Suppose that the annual interest rates in US$,$ EU and Switzerland are respectively, $4\%,3\%,$ and $2\%.$ Suppose also that the expected inflation rates over the next year are $3\mathrm{.}5\%$ in the US$,3\mathrm{.}25\%$ in the EU$,$ and $2\mathrm{.}5\%$ in Switzerland.

Suppose that the current spot exchange rates are CHF$/$USD $0\mathrm{.}94$ and EUR$/$CHF $1\mathrm{.}10.$

Question $1$: What should be the expected profit of the CHF$-$USD carry trade?

Answer:

Choose one of the following answers: $A,B,C$ or D

$A=CHF99\mathrm{.}517$ million

$B=CHF94\mathrm{.}228$ million

$C=-CHF45\mathrm{.}83$ million

$=-CHF76\mathrm{.}721$ million