Mammoth Mutual Fund of New York has $10 million to invest in certificates of deposit (CDs) for the next 6 months (180 days). It can buy either a Pittsburgh National Bank (PNB) CD with an annual yield of 11 percent, or a Swiss bank CD with a yield of 13.5 percent. Assume that the CDs are of comparable default risk. The analysts of the mutual fund are concerned about exchange rate risk. They were quoted the following exchange rates by the international department of a New York City bank: Switzerland (Swiss Francs) Spot $0.520 30-day futures 0.5190 90-day futures 0.5170 180-day futures 0.5155

a. If the Swiss bank CD is purchased and held to maturity, determine the net gain (loss) in U.S. dollars relative to the PNB CD, assuming that the exchange rate in 180 days equals today’s spot rate.

b. Suppose the Swiss franc declines in value by 5 percent relative to the U.S. dollar over the next 180 days. Determine the net gain (loss) of the Swiss bank CD in U.S. dollars relative to the PNB CD for an uncovered position.

c. Determine the net gain (loss) from a covered position.