1. You observe the following information: Spot exchange rate of euro: $1.07/ Six-month forward exchange...
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Accounting
1. You observe the following information: Spot exchange rate of euro: $1.07/ Six-month forward exchange rate: $1.11/. Six-month interest rate for the euro: 4% per annum Six-month interest rate for the dollar: 6% per annum Assume that you can borrow as much as $1,070,000 or 1,000,000. a. Determine whether the interest rate parity (IRP) is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. [Hint: You need to first determine whether the US investor or European investor can borrow and capitalize] c. Explain how the IRP will be restored as a result of covered arbitrage activities (i.e.what's the new forward rate?)
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