PROBLEM 10 (a-c) The treasurer of a middle market, import-export
company has approached you for advice on how to best invest some ofthe
firm’s short-term cash balances. The company, which has been a client of
the bank that employs you for a few years,has $250,000 that it is able
to commit for a one-year holding period. The treasurer is currently
considering two alternatives:(1) invest all the funds in a one-year U.S. Treasury bill offering a bond equivalent yield of 4.25%; and (2) invest all the funds in a Swiss government security over the same horizon, locking in the spot andforward currency exchanges in the FX market. A quick call to the bank’s FX desk gives you thefollowing two-way currency exchange quotes.Swiss France Per U.S. Dollar Per U.S. Dollar Swiss Franc (CHF) Spot 1.5035 0.6651 1-year CHF Futures ——- 0.6586 a.
Calculate the one-year bond equivalent yield for the Swiss government
security that would support the interest rate parity condition.b.
Assuming the actual yield on a one-year Swiss government bond is 5.50
percent, which strategy would leave the treasurer with the greatest
return after one year?c. Describe the transactions that an
arbitrageaur could use to take advantage of this apparent mispricing
and calculate what the profit would be for a $250,000 transaction.
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