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Dear Sir
So, trying to be professional and go beyond, I assumed the reason they gave us the inflation rate being 3 times Switzerland in the US was to give us an idea of spot in 4 months time so did all the calculations on the options as if spot had gone to 1.0688….and I see the answer did not even take this into consideration. It just gave a cost of the options….would I have wasted my time in doing so in the exam??
But you cannot calculate the spot rate in 4 months time, because there is not enough information. The inflation rate in the US is 3 times that in Switzerland, but rate of (say) 2% and 6% will give a different spot rate using the formula than rates of (say) 4% and 12%. All you can do is comment on the fact that the CHF is likely to strengthen against the $, as the answer does.
If you did estimate a spot rate and used that to illustrate how options work (and advised as required) then you would still get the marks.
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