Question
You are a European investor who can borrow $1,000,000 or the equivalent amount in euros today. Suppose the spot rate is $1.20/, and the one-year
You are a European investor who can borrow $1,000,000 or the equivalent amount in euros today.
Suppose the spot rate is $1.20/, and the one-year forward rate is $1.15/. The annual interest rate is 5 percent in the U.S. and 3 percent in Germany.
Check if IRP holds. If it does not hold, set up a covered interest arbitrage. What will be your profit from this arbitrage opportunity in euros?
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Public Finance
Authors: Harvey S Rosen
7th Edition
0072876484, 978-0072876482
