Question
) (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.
) (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:__________
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