Suppose you have a credit line of $$6,000,000$ in the US and Euros $5,000,000$ in Euro zone, and that you can borrow and lend at the prevailing rates of interest in these two areas. Current spot rate of Euro $=$ $$1\mathrm{.}200$; Expected spot rate for Euro, one year from now $=$$$1\mathrm{.}164$; Interest rate in the U$.$S$.=7\mathrm{.}50\%$; Interest rate in the Euro zone $=12\mathrm{.}50\%$

If the current $1-$year forward rate for Euro is $$1\mathrm{.}140$ and you wanted to set up a covered interest rate arbitrage, which of the following forces should result:

Upward pressure on the U$.$S$.$ interest rate.

Downward pressure on the Euro zone interest rate.

Downward pressure on the Euro spot rate.

Downward pressure on the Euro forward rate.

Question $30$

$2\mathrm{.}5pts$

n $\frac{1}{1}\frac{?}{20xx},$ the expected annual inflation rate in the US is $5\mathrm{.}5\%$ and $2\mathrm{.}00\%$ in Japan. The current spot rate for the Japanese Yen $($JPY$)$ is $$0\mathrm{.}01111$

According to Purchasing Power Parity, the expected spot price for JPY on $\frac{1}{1}\frac{?}{20}1$ should be:

$$0\mathrm{.}01133$

$$0\mathrm{.}01111$

$$0\mathrm{.}01074$

$$0\mathrm{.}01149$