i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above. ii) Will the situation persist forever? Explain your answer
i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above. ii) Will the situation persist forever? Explain your answer
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter27: Multinational Financial Management
Section: Chapter Questions
Problem 7MC
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Question
One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Germany. The spot exchange rate for the US dollar is $1.50 to the EURO. The 12-month forward rate is $1.55
i) Assuming you do not have any initial investment funds, suggest a way you
might profit from the pricing inconsistency presented above.
ii) Will the situation persist forever? Explain your answer.
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