Suppose That the Annual Interest Rate Is 5

question 25

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.If an astute trader finds an arbitrage,what is the net cash flow in one year?

• A)$10,690
• B)$15,000
• C)$46,207
• D)$21,964.29

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Definitions:

Systematic Desensitization

A behavioral therapy technique used to reduce anxiety and fear responses through gradual exposure to the feared object or situation.

Hierarchy

A hierarchy is a system or organization in which people or groups are ranked one above the other according to status or authority.

Fears

Emotional responses to perceived threats, which can be instinctive or learned through experiences.

Token Economies

A behavior modification system that uses tokens as reinforcement for desired behaviors, which can be exchanged for rewards.