Question
You are an American investor who can borrow $1,000,000 or the equivalent amount in euros today. Suppose the spot rate is $1.05/, and the one-year
You are an American investor who can borrow $1,000,000 or the equivalent amount in euros today.
Suppose the spot rate is $1.05/, and the one-year forward rate is $1.12/. 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 dollars?
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Capital Budgeting
Authors: Pamela P. Peterson
1st Edition
0471218332, 9780471218333
