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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