Question

Suppose that the US dollar interest rate and the Swiss Franc interest rate are the same, 5 percent per year, but that there is a risk premium of 1 percent associated with holding Swiss Franc rather than US dollars over the year. (a) What is the relationship (in percentage terms) between the current equilibrium dollar/franc exchange rate and its expected future level? (b) If the expected future exchange rate is $1.12 per franc, what is the equilibrium dollar/franc (spot) exchange rate? Now suppose that the expected future exchange rate, $1.12 US per franc, remains constant as Swiss's interest rate rises to 10 percent per year. (c) If the US interest rate also remains constant, what is the new equilibrium dollar/franc exchange rate?

Looking for a 4 to 5 page of solution with no plagarism

Answer 1

b)

c)