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Exchange Rate

pcunniffpcunniff MilwaukeePosts: 38 Associate

Can someone help out with this? I thought the base is CHF..


In which it should be .8(1.1/1.04) = .8462


Question from kaplan below..


The annual risk-free interest rate is 10% in the United States (USD) and 4% in Switzerland (CHF), and the 1-year forward rate is USD/CHF 0.80. Today's USD/CHF spot rate is closest to:

A) 0.7564.

B) 0.8462.

C) 0.8888.


Explanation

We can solve interest rate parity for the spot rate as follows:

With the exchange rates quoted as USD/CHF, the spot is 

.8(1.04/1.10)

=0.7564.


 Since the interest rate is higher in the United States, it should take fewer USD to buy CHF in the spot market. In other words, the forward USD must be depreciating relative to the spot. (LOS 18.h)

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