The one-year Treasury (risk-free) interest rate in the United States is presently 6 percent, while the one-year Treasury interest rate in Switzerland is 13 percent. 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.
- 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?
- 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?