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The One-Year CD Rates for Financial Institutions with AA Ratings

question 99

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The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro. What should be the spot rate in order for no arbitrage to take place, assuming the one-year forward rate is $0.1975/€?


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