Final answer:
Interest rate parity does not hold in this scenario as the forward rate of the Swiss franc is greater than the spot rate. Therefore, it is more advantageous for the investor to make a covered interest arbitrage investment in the Swiss franc.
Step-by-step explanation:
Interest rate parity is a theory that suggests that the difference between two countries' interest rates is equal to the difference between the spot and forward exchange rates of their currencies. This theory helps determine if interest rates in one country are higher or lower than in another country, and whether an investor can take advantage of these differences through arbitrage. In this case, we can determine if interest rate parity holds by comparing the interest rate differential between the U.S. and Swiss rates to the forward premium or discount on the Swiss franc.
In this scenario, the interest rate parity does not hold because the forward rate of the Swiss franc is greater than the spot rate. This indicates that the Swiss franc is at a forward premium. As a result, it is advantageous for the investor to make a covered interest arbitrage investment in the Swiss franc instead of investing in U.S. securities.
To calculate the amount of money in USD the investor has after investing in the US and the covered interest arbitrage investment, we can use the following formulas:
Investment in US: $2,000,000 + ($2,000,000 * 0.045) = $2,090,000
Covered Interest Arbitrage Investment: $2,000,000 * 1.1472 = $2,294,400