Question

TCO B assume the following information. 1-year deposit rate offered by U.S. banks= 12%

1year deposit offered on swiss francs =10%

1year forward rate of Swiss francs=.62

Spot rate of Siss franc=.60

From the perspective of U.S investors with 1,000,000, covered interest arbitrage would yeild a rate of return of ____%

Answer 1

Now the investor has $1,000,000
He converts to swiss Francs at spot rate =1,000,000/0.60=$1,666,666.67
Invest in 1 year at 10% .
After 1 year you shall get=$1,666,666.67*1.10=$1,833,333.33
After 1 year convert back at 0.62 dollar per francs
=1,833,333.33*0.62= $1,136,666.67
Return = 1,136,666.67/1,000,000=13.6667%

This is the total return. However a person would have achieved 12% if he has simply invested in US bank.
Difference in returns = 13.6667%-12%=1.6667%