Suppose That the One-Year Interest Rate Is 5

question 1

Multiple Choice

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must one-year interest rate be in the euro zone to avoid arbitrage?

• A)5.0%
• B)6.09%
• C)8.62%
• D)None of the above

---

Definitions:

Subjective Benefits

Subjective benefits are intangible advantages or value perceived by individuals or organizations, often not directly measurable in monetary terms, such as brand reputation or employee satisfaction.

Initial Outlay

The upfront expenditure necessary to initiate a project or investment.

Incremental Cash Flows

The additional cash flow generated by a company as a result of a decision to undertake a new project or investment.

Capital Budgeting

The process by which a business evaluates and selects long-term investments that are worth more than the cash they cost.