Assume That Instead of Investing in Euro Bonds at a Fixed

Multiple Choice

Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. LIBOR at the end of six months is 5.5 percent. Assume both interest and principal will be reinvested in six months. Assume the spot exchange rate is €1.75/$. What should be the one-year forward rate in order for the bank to earn a spread of 1 percent?

A) €1.7344/$.
B) €1.7418/$.
C) €1.7478/$.
D) €1.7750/$.
E) €1.7842/$.