Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent.
a. Does interest rate parity exist?
b. Can a U.S. firm benefit from investing funds in Germany using covered interest arbitrage?
c. Can a German subsidiary of a U.S. firm benefit by investing funds in the United States through covered interest arbitrage?