Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis:
Does the covered interest parity condition hold? Why or why not?
How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange?
PLEASE SHOW ALL STEPS
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Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the...
3. Covered International Investment What is covered interest parity? Example: Suppose that Britain and U.S. interest rates are SUK=0.04 and ius =0.03 respectively for 90 days, and that the spot exchange rates are $2.00/£, what is the forward exchange rate if the covered interest parity exist?
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