) (4 pts) Assume the following information:

Current spot rate of Euro=$1.156/1 Euro

1-year forward rate of Euro =$1.175/1 Euro

1-Year interest rate in U.S. =3.2% per year

1-Year interest rate in Euro =2.3% per year

I)From a graphical analysis viewpoint of the Interest Rate Parity Condition, does this situation

a.Lie above the IRP Line

b.Lie on the IRP Line

c.Lie below the IRP Line

Pick either A, B or C:__________

II)If the above situation who (if anyone) would benefit from covered interest arbitrage for a 1-year investment,

a.European Investors can earn a higher return from covered interest arbitrage compared to investing locally (Investing locally is a European Investor depositing money in European Bank)

b.Neither European nor US Investors

c.US Investors can earn a higher return from covered interest arbitrage compared to investing locally (US Investor depositing money in US Bank)

Pick either A, B or C:__________