Suppose That the Annual Interest Rate Is 2

question 81

Multiple Choice

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany,and that the spot exchange rate is $1.60/€ and the forward exchange rate,with one-year maturity,is $1.58/€.Assume that an arbitrager can borrow up to $1,000,000 or €625,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

• A)$238.65
• B)$14,000
• C)$46,207
• D)$7,000

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Definitions:

Equilibrium Price

The market price at which the quantity of a good demanded by consumers equals the quantity supplied by producers, leading to a stable market condition.

Supply Falls

A situation where the quantity of goods or services available decreases in relation to demand.

Price Floor

A government- or group-imposed price control or limit on how low a price can be charged for a product.

Equilibrium Price

The price at which the quantity of a good demanded by consumers equals the quantity supplied by producers, leading to market equilibrium.