Explore BrainMass

Explore BrainMass

    International Aspects of Financial Management

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com December 24, 2021, 9:37 pm ad1c9bdddf
    https://brainmass.com/business/international-finance/international-aspects-financial-management-398041

    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%.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 9:37 pm ad1c9bdddf>
    https://brainmass.com/business/international-finance/international-aspects-financial-management-398041

    ADVERTISEMENT