How High Does the Lending Rate in the Euro Zone

question 39

Multiple Choice

How high does the lending rate in the euro zone have to be before an arbitrageur would not consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract? $$\begin{array} { r c c c c } & \text { Bid } & \text { Ask } & \text { Borrowing } & \text { Lending } \\\boldsymbol { s } _ { 0 } ( \$ / € ) & \$ 1.40 - € 1.00 & \$ 1.43 - € 1.00 & \text { i\$ } 4.20 \% \mathrm { APR } & 4.10 \% \mathrm { APR } \\F _ { 360( \$ / € ) } & \$ 1.44 - € 1.00 & \$ 1.49 - € 1.00 & \text { i€ } &\end{array}$$

• A)The bid-ask spreads are too wide for any profitable arbitrage when i_€ > 0
• B)3.48%
• C)?2.09%
• D)none of the options

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