The one-year Treasury (risk-free) interest rate in the U.S. is presently 6%, while the one-year Treasury interest rate in Switzerland is 13%. The spot rate of the Swiss franc is $.80. Assume that you believe in the international Fisher effect. You will receive 1 million Swiss francs in one year.
a. What is the estimated amount of dollars you will receive when converting the francs to U.S. dollars in one year at the spot rate at that time?
b. Assume that interest rate parity exists. If you hedged your future receivables with a one-year forward contract, how many dollars will you receive when converting the francs to U.S. dollars in one year?
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