Suppose That the One-Year Interest Rate Is 5

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 options