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7. Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate

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7. Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12 and the forward exchange rate, with one-year maturity, is $1.16/. Assume that an arbitrager can borrow up to $1,000,000 or 892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/). Does IRP hold? (Spts)

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