1. The two-month interest rates in Switzerland and the United Sates are 2% and 5% per annum, respectively, with continuous compounding. The spot price of the Swiss franc is $0.8000. If the delivery price for a two-month forward contract is $0.8100,
(a) it is too high, and there is a profitable carry trade on this forward contract.
(b) it is too high, and there is a profitable reverse carry trade on this forward contract.
(c) it is too low, and there is a profitable carry trade on this forward contract.
(d) it is too low, and there is a profitable reverse carry trade on this forward contract.
2. Which of the following statement is true for a carry trade?
(a) A carry trade consists of a long position in a forward and a short position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too high.
(b) A carry trade consists of a short position in a forward and a long position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too high.
(c) A carry trade consists of a long position in a forward and a short position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too low.
(d) A carry trade consists of a short position in a forward and a long position in its underlying, and it generates an arbitrage profit if the delivery price in the forward contract is too low.