Multiple Choice
Suppose that the one-year 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 one-year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000.
A) This is an example where interest rate parity holds.
B) This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C) This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D) None of the above
Correct Answer:
Verified
Correct Answer:
Verified
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