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You are an investment manager in Switzerland. You see different interest rates around the world and your exchange trading team (as always staffed by Stern alums) has provided you with the current spot rate and an expected future spot rate between the Swiss and Italian currencies.

*Current spot exchange rate is 0.57 Euros per Swiss Franc

*The 1 year interest rate on the Euros denominated bank deposit is 2.5%

*The 1 year interest rate on the Swiss Franc-denominated bank deposit is 3.0% *Expected future spot rate in 30 days is 0.56 Euros per Swiss Franc

Where will you earn the higher rate of return - Eurozone or Switzerland?

Roughly speaking (we allow for rounding errors): If you invested 6 billion Swiss Franc into a Eurozone bank and then returned it using this expected future spot rate and assuming it turned out to be accurate, how much more money would our firm make or lose in the Eurozone than Switzerland (be sure to note if this was a gain or loss)?

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M92740049
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