Suppose That the One-Year Interest Rate Is 5

question 82

Multiple Choice

Suppose that the one-year 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 one-year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000.

• A)This is an example where interest rate parity holds.
• B)This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
• C)This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
• D)None of the above

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Definitions:

Product Development

The process of bringing a new product or service to the market, from idea generation and design to commercialization.

Introduction Stage

The phase in the product life cycle where a new product is launched into the market, characterized by initial promotional efforts and low sales growth.

Marketing Objective

Specific goals set by a business when promoting its products or services to potential consumers that should be achieved within a certain timeframe.

Introduction Stage

The first stage of a product's life cycle, where it is being introduced to the market, awareness is built, and initial sales growth is sought.