Question

On August 8th the​ six-month risk-free rate of interest in Switzerland was 6 percent. If the spot exchange rate for dollars for Swiss francs is 0.9241 and the​ six-month forward exchange rate is 0.9255​, what would you expect the U.S.​ six-month risk-free rate to​ be?

The U.S.​ six-month risk-free rate is______% (round to decimal places)

Answer 1

This question can be solved using the Interest Rate Parity equation.

Interest Rate Parity is a theory which states that the interest rate differential between any two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

The Interest rate parity equation is :

Applying this to the question we an write it as:

Substituting the values we would get :

=> 1.0015 * (1.06) = 1+ US Risk Free Interest Rate

=> 1.06159 = 1+ US Risk Free Interest Rate

=> 1.06159-1 = US Risk Free Interest Rate

=> US Risk Free Interest rate = 0.06159 or 6.159%

=> US Risk Free Interest Rate = 6.16% (to two decimal places)