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Assume that annual interest rates are 8 percent in the

Question: Assume that annual interest rates are 8 percent in the United States and 4 percent in Switzerland. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.60/Sf.

a. If the forward rate is $0.64/Sf, how could the bank arbitrage using a sum of $1 million? What is the spread earned?

b. At what forward rate is this arbitrage eliminated?

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