. With 10-year government yields -0.35% in Germany and 2% in the U.S., a seemingly obvious...

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. With 10-year government yields -0.35% in Germany and 2% in the U.S., a seemingly obvious strategy would be to borrow euros

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Answer 1

Answer #1

According to interest rate parity therom the currency which has higher interest rate will sell at discount in the future to cancel all the available arbitrage opportunities

So here yield in Germany is -0.35 and in us is 2% so we expect the us dollar to depreciate in future

According to interest rate parity therom

F/S =(1+rh)^n/(1+rf)^n

Where f is forward rate

S is spot rate

rh is home currency yield

And rf is foreign currency yield

In the above equation if LHS is equal to rhs then there is no chance of arbitrage

If LHS is not equal to rhs then there is chance for arbitrage

So i recommend this trade after checking forward rate for dollar Euro pair if there is chance for arbitrage by above equation we will enter the trade by covered interest arbitrage

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Answer 2

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