Question

The one-year forward rate for the Swiss franc is SF1.1617/$. The spot rate is SF1.1731/$. The interest rate on a risk-free asset in Switzerland is 2.99 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.?

Multiple Choice

• 3.20%

• 1.99%

• 3.50%

• 3.75%

• 4.00%

Answer 1

F = S * (1 + risk-free interest rate in Switzerland)/(1 + risk-free interest rate in the U.S.)

(1 + risk-free interest rate in the U.S.) = S/F * (1 + risk-free interest rate in Switzerland)

(1 + risk-free interest rate in the U.S.) = 1.1731/1.1617 * (1 + 0.0299)

(1 + risk-free interest rate in the U.S.) = 1.0400066196

risk-free interest rate in the U.S. = 1.0400066196 - 1

risk-free interest rate in the U.S. = 0.0400066196

risk-free interest rate in the U.S. = 4.00%