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Suppose that the treasurer of IBM has an extra cash reserve of $15,000,000 to invest for three months. The three-month interest rate is 6 percent

  1. Suppose that the treasurer of IBM has an extra cash reserve of $15,000,000 to invest for three months. The three-month interest rate is 6 percent per annum in the United States and 7.5 percent per annum in Germany. Currently, the spot exchange rate is 1.01 per dollar. The treasurer of IBM does not wish to bear any exchange risk.
    1. What should the three-month forward rate be for interest rate parity to hold.
    2. If the three-month forward exchange rate is 1.12 per dollar. Where should he/she invest to maximize the return?

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