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/$, which of the following one-year forward exchange rates would convince you to invest in Switzerland?
A)Sf1.55/$
B)Sf1.60/$
C)Sf1.65/$
D)Sf1.70/$ Difference in interest rates = Difference between forward and spot rates

Question

Quizplus · Accepted Answer

To invest in Switzerland, the forward rate needs to be higher than the spot rate. By using the interest rate parity formula, we can determine the difference in the forward and spot rate needed for an equal return. 
6% - 3% = 3%
3%/1.6 = 1.875%
Therefore, the forward rate would need to be 1.875% above the spot rate or Sf1.632/$. Option A is the closest to this rate, making it the best choice.

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