The interest rate on one-year risk-free bonds is 4.25 percent in the United States and 3.75 percent in Switzerland. The current exchange rate is $0.65 per Swiss franc. Suppose that you are a U.S. investor and you expect the Swiss franc to appreciate by 2.75 percent over the next year.
a. Calculate the foreign currency risk premium.
b. Calculate the domestic currency return on the foreign bond, assuming that your currency appreciation expectations are met.