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# International Aspects of Financial Management

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The 1-year forward rate for the Swiss franc is Sf1.1375 - \$1. The spot rate is Sf1.1426 =\$1. The interest rate on a risk-free asset in Switzerland is 3.3 percent. If interest rate parity exists, a 1-year risk free security in the U.S. is yielding ___percent?

a) 2.28 percent
b) 2.51 percent
c) 2.98 percent
d) 3.40 percent
e) 3.76 percent.

## SOLUTION This solution is FREE courtesy of BrainMass!

If interest rate parity exists, than

Spot rate * (1+ risk free rate) = Forward rate * (1+ other currency risk free rate)

Then, we have

1.1426 * (1+3.3%) = 1.1375 * (1+US risk free rate)

or 1.1426*1.033 = 1.1375 * (1+US risk free rate)
or 1.1803 = 1.1375 * (1+US risk free rate)
or 1+US risk free rate = 1.1803/1.1375
or 1+ US risk free rate = 1.03763
or US risk free rate = 1.03763 - 1 = 0.0376 or 3.76%.

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