Question

Current spot rate of SF = $0.6543. 1-year interest rate in the U.S. = 7.5%. 1-year interest rate in the Switzerland = 3.5%. If you could borrow $10,000,000 in the US, and set up an uncovered interest rate arbitrage, how many dollars will you have at the end of one-year (after paying off the loan) if you expect the spot rate of SF one year from now to be $0.6925.

Answer 1

$204264.10 dollars you will have at the end of one-year (after paying off the loan) if you expect the spot rate of SF one year from now to be $0.6925

Step-by-step explanation:

change in SR = 0.05838

cost of uncovered rate = (1 + 0.05838)*1.035 - 1

= 9.543%

total dollars end of one year = (0.09543 - 0.075)*10000000

= $204264.10

Therefore, $204264.10 dollars you will have at the end of one-year (after paying off the loan) if you expect the spot rate of SF one year from now to be $0.6925