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Suppose you observe the spot euro at $1.50/€, the U. S. risk-free interest rate of 3.25%...

Suppose you observe the spot euro at $1.50/€, the U. S. risk-free interest rate of 3.25% (continuously compounded), and the six month futures price of $1.50/€. Identify the correct implied European risk-free interst rate (select the closest answer).

                a.             –3.25%

                b.             –1.0%

                c.             0.0%

                d.             1.0%

                e.             3.25%

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Answer #1

If the futures price is same as spot price then the rates must also be equal. So, European risk free rate=3.25%

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