A one-year bond denominated in Swiss Francs earns an interest rate of 3.5% per year. A one-year bond denominated in dollar earns 4% per year and the exchange rate is SF/$ .998514. Assume that an investor can hedge on the forward market and that the 90-day forward exchange rate is SF/$.988531
a. Calculate the forward discount on the SF with respect to the $ on a yearly basis (include the sign).
b. Is the SF at a forward discount or at a forward premium with respect to the $?
c. Calculate the return of a SF invested in the US for 1 year i. use the exact formula: ii. use the approximation:
d. In which direction does capital flow?