5 percent (annual) interest on their 180-day (6 months) deposits. On similar deposits, American banks pay 1.5 percent (annual.) Assuming that the 180-day forward rate of Swiss franc is $1.045,
Do you see an arbitrage opportunity between these two countries? Briefly explain.
If your answer were yes, how you would be able to take advantage from it and how much you would make on $100,000 investment?
The arbitrage transactions are expected to be followed by some adjustments in the market which will eventually make the arbitrage opportunity disappear. What kind of adjustment do you expect to see in each of the following?
The US interest rate
The spot exchange rate between the dollar and the Swiss franc
The 6-month forward rate between the dollar and the Swiss franc
The Swiss interest rate