Today's spot exchange rate: 1 euro = $1.25. US interest rate (home interest rate) is 7%. EU interest rate (foreign interest rate) is 10%. a) If the IRP (Interest rate parity) holds, what should the forward exchange rate be today? b) Assume that today, you invest $500 in the EU market for one year and at the same time, enter a currency forward contract to sell euro in a year at the forward rate from part a). If today's spot exchange rate is: 1 euro=$1.32 instead of $1.25, show how much profits or losses you make next year.
Today's spot exchange rate: 1 euro = $1.25. US interest rate (home interest rate) is 7%. EU interest rate (foreign interest rate) is 10%. a) If the IRP (Interest rate parity) holds, what should the forward exchange rate be today? b) Assume that today, you invest $500 in the EU market for one year and at the same time, enter a currency forward contract to sell euro in a year at the forward rate from part a). If today's spot exchange rate is: 1 euro=$1.32 instead of $1.25, show how much profits or losses you make next year.
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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Today's spot exchange rate: 1 euro = $1.25.
US interest rate (home interest rate) is 7%.
EU interest rate (foreign interest rate) is 10%.
a) If the IRP (Interest rate parity) holds, what should the forward exchange rate be today?
b) Assume that today, you invest $500 in the EU market for one year and at the same time, enter a currency forward contract to sell euro in a year at the forward rate from part a). If today's spot exchange rate is: 1 euro=$1.32 instead of $1.25, show how much
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