III. Consider three countries, Balamb, Dollet, and Esthar, with currencies B$, D$, and E$, respectively. All three countries trade with one another. You live in Balamb and currently have B$500. The nominal interest rate in Balamb is iB = 0.011, the nominal interest rate in Dollet is iD = 0.060, and the nominal interest rate in Esthar is iE = 0.012. The spot rates are EB/D = 0.70 and EB/E = 1.19. The forward rates are FB/D = 0.68 and FB/E = 1.25. For c) to e), suppose that covered interest rate parity holds. All of the values given in the question are unchanged except iB and EB/E, which are not known and must be solved. Further, suppose that 80% of Balamb's trade is with Dollet and 20% of Balamb's trade is with Esthar. What value does EB/E take?
III. Consider three countries, Balamb, Dollet, and Esthar, with currencies B$, D$, and E$, respectively. All three countries trade with one another. You live in Balamb and currently have B$500. The nominal interest rate in Balamb is iB = 0.011, the nominal interest rate in Dollet is iD = 0.060, and the nominal interest rate in Esthar is iE = 0.012. The spot rates are EB/D = 0.70 and EB/E = 1.19. The forward rates are FB/D = 0.68 and FB/E = 1.25. For c) to e), suppose that covered interest rate parity holds. All of the values given in the question are unchanged except iB and EB/E, which are not known and must be solved. Further, suppose that 80% of Balamb's trade is with Dollet and 20% of Balamb's trade is with Esthar.
What value does EB/E take?
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