If annualized interest rates in the U. S. and Switzerland are 10% and 4%, respectively, and the 90 day forward rate for the Swiss franc is $.3864, at what current spot rate will interest rate parity hold

Question

Jaycee Wade

Business

24 May, 04:23

If annualized interest rates in the U. S. and Switzerland are 10% and 4%, respectively, and the 90 day forward rate for the Swiss franc is $.3864, at what current spot rate will interest rate parity hold

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Answers (1)

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Walls · Answer 1

Spot rate = 0.3807

Explanation:

Given:

Interest rates in the U. S. = 10% = 0.1

Interest rates in Switzerland = 4% = 0.04

Forward rate = $0.3864

Spot rate = ?

Day ratio = 90 days / 360 days = 0.25 (Assume 360 days in a year)

Computation of Spot rate:

Spot rate = Forward rate[1 + (Domestic rate * Day ratio) ] / [1 + (Foreign rate * Day ratio) ]

Spot rate = 0.3864[1 + (0.04 * 0.25) ] / [1 + (0.10 * 0.25) ]

Spot rate = 0.3864[1+0.01] / [1+0.025]

Spot rate = 0.3864[1.01] / [1.025]

Spot rate = 0.390264 / [1.025]

Spot rate = 0.3807