Consider 8.5 % Swiss franc/U.S. dollar dual currency bonds which pay $666.67 at maturity per SF1,000 of par value. Describe implicit SF/$ exchange rate at maturity? Will the investor be better or worse off at maturity if the real SF/$ exchange rate is SF1.35/$1.00?
Implicitly, the dual currency bonds call for exchange of SF1, 000 of face value for $666.67. Thus, the implicit exchange rate created into the dual currency bond issue is SF1,000/$666.67, or SF1.50/$1.00. If the exchange rate at maturity is SF1.35/$1.00, SF1,000 would purchase $740.74 = SF1,000/SF1.35. Therefore, the dual currency bond investor is worse off with $666.67 since the dollar is at a depreciated level in comparison to the implicit exchange rate of SF1.50/$1.00.