| December 8, 2015

A bank purchases a six month 1 million euro dollar deposit at an interest rate of 6.5 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.18/SKr.

a. The six-month forward rate on the Swedish krona is being quoted at $0.18/SKr. What is the net spread earned on this investment if the bank covers its foreign exchange exposure using the forward market?

b. At what forward rate will the spread be only 1 percent per year?

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