Question
As of today, the spot exchange rate is 1.6/$. The U.S. interest rate is 4% and the interest rate in the euro zone is 8%.
As of today, the spot exchange rate is 1.6/$. The U.S. interest rate is 4% and the interest rate in the euro zone is 8%.
A. What is the one-year forward rate that should prevail according to IRP? (Assume the US is the home country and round intermediate steps to four decimals.)
B. Suppose that the one year forward rate is 1.2/$. Find the profit (in terms of percentage returns) you could earn via covered interest arbitrage. Round intermediate steps to four decimals.
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Applied Quantitative Finance
Authors: Härdle
3rd Edition
3662544857, 978-3662544853
