Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.

a. appreciate; 3%
b. appreciate; 1%
c. depreciate; 3%
d. depreciate; 2%
e. appreciate; 2%


Nominal rate = Real rate + Inflation.

Hence, inflation in US = 3% and inflation in Swiss = 1%

As the inflation is lower in Swiss, franc should appreciate by 3% – 1% = 2% against the dollar.


We know that Nominal rate = Real rate + Inflation.

Using the above formula,we can figure out

inflation in US= 3 %

Inflation in swiss=1 %

The expected future spot rate is calculated by multiplying the spot rate by a ratio of the foreign interest rate to domestic interest rate:

the Spot rate for swiss franck would be 1(1.06/1.04)=1.0192

the swiss franck will appreciate by 1.0192-1=.0192 or 2%