Suppose That the Annual Interest Rate Is 5

Multiple Choice

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€) .
-The above mentioned scenario:

A) is an example of covered interest arbitrage (CIA) , and interest rate parity (IRP) holds.
B) is an example of covered interest arbitrage (CIA) , and interest rate parity (IRP) does NOT hold.
C) is an example of Purchasing Power Parity (PPP) , and hyperinflation.
D) none of these