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What is interest rate parity? Assume that currently, you can exchange 1 euro for 1.27 dollars in the 180-day forward market, and the risk-free rate
What is interest rate parity? Assume that currently, you can exchange 1 euro for 1.27 dollars in the 180-day forward market, and the risk-free rate on 180-day securities is 6 percent in the United States and 4 percent in France. Suppose the spot rate is 1 euro for 1.25 dollars. Does interest rate parity hold? If not, which securities offer a higher expected return? Demonstrate your answer in detail.
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