Correct answer: D. 13.50%

Using the hedged cash flows:

• Six-month Eurodollar deposit repayment: $1{,}000{,}000 \times \left(1 + \frac{0.025}{2}\right) = $1,012,500$
• Swedish bond principal in SEK: $1{,}000{,}000 / 0.1140 = 8,771,929.82$ SEK
• Swedish bond value at maturity in SEK: $8,771,929.82 \times \left(1 + \frac{0.035}{2}\right) = 8,925,438.60$ SEK
• Converted back to USD using the forward rate: $8,925,438.60 \times 0.1210 = $1,079,978.07$

Net spread for six months:

• $1,079,978.07 - 1,012,500.00 = 67,478.07$ in favor of the investment
• As a fraction of $1,000,000: 0.06748$ for six months
• Annualized with semiannual compounding: approximately 13.50%