The following information is provided to you: $$\begin{array} { | l | l | }
\hline \text { Spot exchange rate for Swiss franc } & = \$ 0.61 ( \mathrm { U } . ) / \mathrm { Sfr } \
\hline \text { One-year forward rate for Swiss frane } & = \$ 0.63 ( \mathrm { U } . ) / \mathrm { Sfr } \
\hline \text { One-year U.S. interest rate } & = 5 \% \
\hline
\end{array}$$ What is the one-year interest rate for Swiss franc?
A)2.00%
B)1.67%
C)1.50%
D)1.33%

Question

The following information is provided to you: $$\begin{array} { | l | l | } 
\hline \text { Spot exchange rate for Swiss franc } & = \$ 0.61 ( \mathrm { U } . ) / \mathrm { Sfr } \
\hline \text { One-year forward rate for Swiss frane } & = \$ 0.63 ( \mathrm { U } . ) / \mathrm { Sfr } \
\hline \text { One-year U.S. interest rate } & = 5 \% \
\hline
\end{array}$$ What is the one-year interest rate for Swiss franc?
A)2.00%
B)1.67%
C)1.50%
D)1.33%

Quizplus · Accepted Answer

The one-year interest rate for Swiss franc can be calculated using the interest rate parity formula, which states that the forward rate should incorporate the difference in interest rates between the two countries. Given the spot rate of $0.61 and the forward rate of $0.63, we can calculate the Swiss interest rate as follows: $$ \frac{0.63}{0.61} - 1 = 0.0328 $$ or 3.28%. However, this total return includes both the interest rate differential and the appreciation of the Swiss franc against the dollar. Since the U.S. interest rate is 5%, the Swiss interest rate must be lower to account for the franc's appreciation. The correct calculation adjusts for the U.S. rate: $$ 5\% - 3.28\% = 1.72\% $$ The closest option to this calculation is 1.67%, indicating a slight approximation in the interest rate parity calculation or rounding in the options provided.

The Following Information Is Provided to You What Is the One-Year Interest Rate for Swiss Franc? A)2

The Following Information Is Provided to You What Is the One-Year Interest Rate for Swiss Franc?
A)2