Explanation:
Using the interest rate parity formula, the futures exchange rate is computed as follows:
F_0 = 1.02 \times (1.01 / 1.02)^{7/12} = \`$1.01`4 \text{ per CHF}(Book 4, Module 52.1, LO 52.c)
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Question 98
An investor wishes to compute the exchange rate of a 7-month futures contract on the Swiss franc. Each contract controls 125,000 Swiss francs and is quoted in terms of USD per CHF. Suppose the current exchange rate is 1.02 USD per CHF. What is the 7-month futures exchange rate assuming an annually compounded risk-free rate in Switzerland of 2% and an annually compounded risk-free rate in the U.S. of 1%?
A
0.987 USD per CHF.
B
1.002 USD per CHF.
C
1.014 USD per CHF.
D
1.225 USD per CHF.
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