Suppose We Observe the Following 1-Year Interest Rates

question 22

Essay

Suppose we observe the following 1-year interest rates:
Euro $ = 15%
Euro SF = 12%
The exchange rate is quoted as the dollar price of Swiss francs and is currently E = 0.40.
(a) Given the information above,what is the 12-month forward rate?
(b) Suppose the actual 12-month forward rate is not what you found from (a),but instead is $0.42. What would profit-seeking arbitrageurs do?

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