Answer:
Current spot rate for the Swiss frank will interest rate parity hold is <u>$1.0214</u>
Explanation:
As per given data
Annualized nominal interest rates in the US = 12%
Annualized nominal interest rates in the Switzerland = 8%
90 days forward rate = $1.0218
As we know
According to interest rate parity theory
Forward rate differential = Interest rate differential
( ( F - S ) / S ) x (360/n) = ( ( 1 + ru ) / ( 1 + rs ) ) - 1
Where
F = Forward Rate = $1.0218
S = Spot rate = ?
n = numbers of days = 90 days
ru = Annualized nominal interest rates in the US = 12%
rs = Annualized nominal interest rates in the Switzerland = 8%
Placing the values in the formula
( ( $1.0218 - S ) / S ) x (360/90) = ( ( 1 + 12% ) / ( 1 + 8% ) ) - 1
( ( $1.0218 - S ) / S ) x 4 = ( 1.12 / 1.08% ) - 1
( ( $1.0218 - S ) / S ) x 4 = 0.037037
( ( $1.0218 - S ) / S ) = 0.037037 / 4
( $1.0218 - S ) / S = 0.00925925
$1.0218 - S = S0.00925925
$1.0218 = S0.00925925 + S
$1.0218 = S1.00925925
S = $1.0218 / 1.00925925
S = $1.0214
