Question
Currently, interest rate is 2 percent per annum in the U.S. and 6 percent per annum in the euro zone, respectively. The spot exchange rate
Currently, interest rate is 2 percent per annum in the U.S. and 6 percent per annum in the euro zone, respectively. The spot exchange rate is $1.25 = 1.00, and the one-year forward exchange rate is $1.20 = 1.00. As informed traders recognize the deviation from IRP and start carrying out covered interest arbitrage transactions to earn a certain profit, how will IRP be restored as a result?
A. Interest rate in the euro zone will rise; interest rate in the U.S. will fall; euro will appreciate in the spot market; euro will appreciate in the forward market | ||
B. Interest rate in the euro zone will fall; interest rate in the U.S. will rise; euro will depreciate in the spot market; euro will depreciate in the forward market | ||
C. Interest rate in the euro zone will rise; interest rate in the U.S. will fall; euro will depreciate in the spot market; euro will appreciate in the forward market | ||
D. Interest rate in the euro zone will fall; interest rate in the U.S. will rise; euro will appreciate in the spot market; euro will depreciate in the forward market |
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