U.S.investments with a one-year maturity can be made for 6% and Swiss one-year investments can be made for 3%.If the spot exchange rate is Sf1.6/$,which of the following one-year forward exchange rates would convince you to invest in Switzerland?

Question

Quizplus · Accepted Answer

To invest in Switzerland, the forward rate should be such that the return on Swiss investment is at least equal to the U.S. investment. The forward rate that makes the Swiss investment attractive is calculated using interest rate parity: Forward Rate = Spot Rate * (1 + Interest Rate in Foreign) / (1 + Interest Rate in Domestic). Using the given rates: Forward Rate = 1.6 * (1 + 0.03) / (1 + 0.06) = 1.558. Therefore, a forward rate of Sf1.55/$ would make the Swiss investment attractive.

USInvestments with a One-Year Maturity Can Be Made for 6