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What is the expected spot rate in 1 year? Explain which two international parity conditions you...

  1. What is the expected spot rate in 1 year? Explain which two international parity conditions you could use to reach this result.
  2. According to the interest Rate Parity condition ,what is the 1 year forward exchange rate? Is there an arbitrage opportunity? Why?
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Answer #1

Interest Rate Parity (IRP) is a theory in which the differential between the interest rates of two countries remains equal to the differential calculated by using the forward exchange rate and the spot exchange rate techniques.

Expected Spot Rate in 1 year = Spot Rate (1 + Domestic Country Interest Rate) / (1+ Foreign country Interest Rate)

Expected Exchange Rate in 1 year = Spot Exchange Rate (1 + Domestic Country Interest Rate) / (1+ Foreign country Interest Rate)

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