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Suppose that the US economy grows and that the Swiss economy does not. How will this difference affect the exchange rate between the dollar and the Swiss franc? Why?

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Anne Gillian Duero
Anne Gillian DueroLv10
23 Oct 2020

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Related questions

12. Casper Landsten CIA. Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short-term money market investment and wonders if he should invest in U.S. dollars for three months, or make a CIA investment in the Swiss franc. He faces the following quotes:

13. Casper Landsten UIA. Casper Landsten, using the same values and assumptions as in problem 12, decides to seek the full 4.800% return available in U.S. dollars by not covering his forward dollar receipts an uncovered interest arbitrage (UIA) transaction. Assess this decision.

Give $1000,000 and the following information

Spot Rate(SFr/$)

1.2810

3-Month forward rate(SFr/$)

1.2740

US-dollar 3-Month interest rate

4.800%

Swiss Franc 3-Month interest rate

3.200%

You are a foreign exchange trader specialized in the US dollar Swiss franc market (USD/CHF). One morning, you notice that the one-year dollar interest rate is 4%, while the one-year interest rate on Swiss francs is 2.7%. Today’s USD/CHF rate is $1.7.

(a) What spot rate do you expect for the USD/CHF in one year?

(b) You log onto your electronic brokerage account and find that the current quote for the 360- day forward rate on USD/CHF is 1.79. Is there an arbitrage opportunity? If so, describe how you would take profit from it and how much you would get if you invested $1. What do you anticipate if all of your fellow traders start doing the same?

1) "A balance of trade deficit must always be offset by net capital inflows from abroad." Agree or disagree with this statement and explain.

2) Suppose a Japanese firm buys a 1 year treasury bill with a face value of $10,000 today for $9400. If the value of the dollar declined from 90 to 80 yen during the year, what rate of return does the Japanese firm earn on its investment?

3) The treasurer of a U.S. firm noted that although short run deposits in Swiss bank accounts had earned the firm only a 3% annualized return when measured in Swiss francs, in dollars the firm had realized a 12% rate of return. Explain as precisely as possible how this was possible.

4) In recent years the exchange rate of the $ has been noticeably high against the yen. If for some reason investors around the world now decide that this increase is a temporary phenomena and that the $ will fall relative to the yen in coming months, what would be the effect on prices of U.S. Treasury Securities? Explain.

5) Do US producers of tradable goods prefer a strong dollar or a weak dollar in currency markets? Explain.

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