Question
The table below shows the information for exchange rates and interest rates in the US and Italy. Answer the following questions Current spot rate: $1.39/
The table below shows the information for exchange rates and interest rates in the US and Italy. Answer the following questions
Current spot rate: $1.39/
One-year forward rate: $1.37/
Interest rate in the US: 4%
Interest rate in Italy: 3.4%
(a) Find the 1-year forward exchange rate in $ per that satisfies IRP from the perspective of a customer that borrowed $1000 traded for at the spot and invested in Italy.
(b) There is one profitable arbitrage at these prices. How can you conduct the covered interest arbitrage if you can either borrow $1000 in the US or 1000 in Italy? What would be the profit?
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