


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 riskfree interest rate is 10% in the United States (USD) and 4% in Switzerland (CHF), and the 1year 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)
Comments
Yes the base is CHF.
Using Interest Rate Parity: (0.8/Spot)  1 = (10%  4%) / (1+4%) = 0.05769
0.8 / Spot = 1.05769
Spot = $0.7564 per CHF 1