3 month Swiss rate...[e^(0.00025*(3/12)] - 1 = 0.00063
Note that at the current spot rate, if 1SF = $1.0404, then one SF costs 1/1.0404 = $0.96117
The three month forward gives you 1SF = $1.03, so one SF costs 1/1.03 = $0.97087
So you want to sell the SFs in the future and buy them now, in order to make a profit. Or, conversely, buy the dollar now, and sell it in the future.
So your arbitrage strategy is
(I'll use 1,000 nominal amount to show how this will work)
Borrow 1,000SF, in 3 months you'll owe 1,000(1.00063) = 1,000.63SF
Use (sell) the 1,000SF you borrowed to buy USD at spot = 1,000*1.0404 = $1,040.40
Enter into the forward contract to sell dollars/ buy SF
in three months, in order to pay off the SF loan, buy 1,000.63SF at the forward rate costing (selling dollars/buying SF) $0.97087*1000.63 = $971.48
Use the 1,000.63SF you bought in the forward to pay off the loan, and keep the USD difference.
Your profit is calculated: $1,040.40(received) - $971.48(paid) = $68.92
Part II:
"How does your answer change if the exchange rate is 1.0500($ per franc). "
If they mean the current spot rate is 1.05, that would mean you'd make even MORE money. They probably mean that, because with the Swiss rate > US rate, the Swiss franc would be depreciating against the dollar in 3 months, based on interest rate parity (e.g. the 1.0500 wouldn't be the forward rate, the forward rate should be less than the spot rate).
In early 2012, the spot exchange rate between the Swiss Franc and the U.S dollar was 1.0404($ per franc). Interest rates in the U.S. and Switzerland were 0.25% and the 0% per annum, respectably, with continuous compounding. The three-month forward exchange rate was 1.0300($ per franc). What arbitrage strategy was possible? How does your answer change if the exchange rate is 1.0500($ per franc).
