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The following graph plots the forward premium for a foreign currency along the horizontal axis, while measuring the interest rate differential ( between a home
The following graph plots the forward premium for a foreign currency along the horizontal axis, while measuring the interest rate differential between a home country and a foreign country along the vertical axis. refers to the interest rate in the home country, while refers to the interest rate in aforeign country.
On the following graph, use the blue line circle symbol to plot the combinations of the forward premium and interest rate differential that are consistent with interest rate parity IRPThe following graph shows the IRP line in blue along with several hypothetical points, A through that represent combinations of interest rate differentials and forward premiums.
Use the graph to fill in the table that follows. For each point on the previous graph, use the table to indicate whether covered interest arbitrage is feasible for that combination of interest rate For each point on the previous graph, use the table to indicate whether covered interest arbitrage is feasible for that combination of interest rate
differential and forward premium.
Note: Assume there are no transaction costs.
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