Suppose That the Annual Interest Rate Is 5

question 4

Multiple Choice

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€) .
-The above mentioned scenario:

• A) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) holds.
• B) is an example of covered interest arbitrage (CIA), and interest rate parity (IRP) does NOT hold.
• C) is an example of Purchasing Power Parity (PPP), and hyperinflation.
• D) none of these

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Definitions:

Dopamine

A neurotransmitter in the brain associated with pleasure, movement, and the reward system.

Antipsychotic Drugs

Medications used to treat symptoms of severe psychiatric disorders, such as schizophrenia and bipolar disorder, often by affecting dopamine receptors in the brain.

Schizophrenia

A chronic and severe mental disorder that affects how a person thinks, feels, and behaves, characterized by delusions, hallucinations, and other cognitive impairments.

Tardive Dyskinesia

A neurological syndrome characterized by repetitive, involuntary movements, often resulting from long-term use of certain psychiatric medications.