A Currency Dealer Has Good Credit and Can Borrow Either

question 47

Multiple Choice

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?

• A)$1.2471 = €1.00
• B)$1.20 = €1.00
• C)$1.1547 = €1.00
• D)none of the options

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Definitions:

Markup Rate

The percentage increase in price applied to the cost price of a product to determine its selling price.

Tourist Shop

A store that specializes in selling souvenirs and merchandise aimed at tourists.

Markup

The amount by which the cost of a product is increased to arrive at its selling price.

Selling Price

The amount of money for which an item or service is sold to a customer.