Describe how you construct the uncertain ₤-denominated return from i

Describe how you construct the uncertain ₤-denominated return from investing 1 ₤ in the Swiss franc money market.

What will be an ideal response?

ANSWER

Answer: If you invest ₤ in the Swiss money market, you first must convert from ₤ into Swiss francs in the spot foreign exchange market. With the Swiss francs that you get, you invest in the Swiss money market, leaving the investment unhedged. At the end of the investment horizon, you convert from Swiss francs back into ₤at the future spot exchange rate.