You are a foreign exchange trader specialized in the US dollar Swiss franc market (USD/CHF). One morning, you notice that the one-year dollar interest rate is 4%, while the one-year interest rate on Swiss francs is 2.7%. Today’s USD/CHF rate is $1.7. What spot rate do you expect for the USD/CHF in one year?


closed as off-topic by skoestlmeier, Helin, LocalVolatility, amdopt, Lliane May 16 at 1:48

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    $\begingroup$ As the answer by @andrewleef1 indicates, the expected spot rate in 1 year is simply the currently observed 1-year forward rate. DYI, the relationship used in the answer is called the Covered Interest Rate Parity and is central in FX theory. $\endgroup$ – AdB May 1 at 8:29

1 USD today will be worth 1.04 USD in 1 year. Similarly, 1.7 CHF today will be worth 1.7459 CHF in 1 year. As a result, we can expect the USD/CHF rate in one year to simply be 1.7459/1.04 = 1.67875.


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