Suppose That the One-Year Forward Price of Euros in Terms

question 8

Multiple Choice

Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euro it is 4 percent. Under these assumptions

• A) interest parity does not hold.
• B) interest parity does hold.
• C) it is hard to tell whether interest parity does or does not hold.
• D) interest parity fluctuates.
• E) Not enough information is given to answer the question.

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Definitions:

Symmetric

Characteristic of a shape or figure that is identical on both sides of a central line; it applies broadly to situations where two sides of something are mirror images of each other.

Bell Shaped

Descriptive of a graph or distribution which is symmetrical and has its highest point in the middle, tapering off evenly on both sides, characteristic of a normal distribution.

Normal Distribution

A bell-shaped probability distribution characterized by its mean and standard deviation, frequently occurring in nature and statistics.

Symmetric

A characteristic of an object or a distribution in which it is identical in shape on both sides of a central axis.