1.Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is 0.8/$; and the one-year forward exchange rate is $1.29/. What must the one-year interest rate be in the euro zone to avoid arbitrage? (Please explain/ show how to arrive at this answer in the simplest way possible)

a.0.00%

b.0.17%

c.1.74%

d.2.21%

Ans: C