Assume the following information:
$\begin{array} { l l l }
\text { Spot rate today of Swis franc } & = & \$ 60 \
1 \text {-year forward rate as of today far Swiss franc } & = & \$ .63 \
\text { Fognected spot rate l year from now } & = & \$ 64 \
\text { Rate an 1-year deposits denominated in Swiss francs } & = & 7 \% \
\text { Rate an } 1 \text {-year deposits denominated in U.S. dallars } & = & 9 \%
\end{array}$
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.
A) 5.00
B) 12.35
C) 15.50
D) 14.13
E) 11.22

Question

Assume the following information:
$\begin{array} { l l l } 
\text { Spot rate today of Swis franc } & = & \$ 60 \
1 \text {-year forward rate as of today far Swiss franc } & = & \$ .63 \
\text { Fognected spot rate l year from now } & = & \$ 64 \
\text { Rate an 1-year deposits denominated in Swiss francs } & = & 7 \% \
\text { Rate an } 1 \text {-year deposits denominated in U.S. dallars } & = & 9 \%
\end{array}$
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.
A) 5.00
B) 12.35
C) 15.50
D) 14.13
E) 11.22

Quizplus · Accepted Answer

$\begin{array} { l } 
\begin{aligned}
\$ 1,000,000 / \$ .60 & = \mathrm { SF } 1,666,667 \times ( 1.07 ) \
& = \mathrm { SF } 1,783,333 \times \$ .63 = \$ 1,123,500
\end{aligned} \
\text { Yield } = ( \$ 1,123,500 - \$ 1,000,000 ) / \$ 1,000,000 = 12.35 \%
\end{array}$

Assume the Following Information From the Perspective of U