assume that the one - year interest rate is 4.0 percent in the united states; the sp exchange rate is $1.25/euro, and the one-year forward exchange rate is $1.16/ euro. what must the one - year interest rate be in the euro - zone to avoid arbitrage?

assume that the one - year interest rate is 4.0 percent in the united states; the sp exchange rate is $1.25/euro, and the one-year forward exchange rate is $1.16/ euro. what must the one - year interest rate be in the euro - zone to avoid arbitrage?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Currency Market

The currency market, also known as the foreign exchange market, consists of currencies worldwide. This market determines the rate of all currencies based on the buying and selling of forex. It is an over-the-counter market. It is the largest and most liquid market based on trade volume.

Question

assume that the one-year interest rate is 4.0 percent in the united states; the spot
exchange rate is $1.25/euro, and the one-year forward exchange rate is $1.16/
euro, what must the one - year interest rate be in the euro - zone to avoid
arbitrage?

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