Suppose that the one-year U.S.interest rate is 5% and the equivalent one-year Swiss interest rate is 4%.According to the covered interest rate parity,there is a ________ on the Swiss franc.

Question

Quizplus · Accepted Answer

According to covered interest rate parity, the forward exchange rate should reflect the interest rate differential between the two currencies. In this case, since the US interest rate is higher than the Swiss interest rate, the Swiss franc should be at a forward premium against the US dollar. The premium should be equal to the difference in interest rates, which is 1%. Therefore, the correct answer is B, 1% forward premium.

Suppose That the One-Year U