7) (6 pts) Assume the following information: Current spot rate of Euro 1-year forward rate...
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7) (6 pts) Assume the following information: Current spot rate of Euro 1-year forward rate of Euro 1-Year interest rate in U.S. 1-Year interest rate in Euro $1.156/1 Euro $1.175/1 Euro 5.2% per year 4.3% per year 1) From a graphical analysis viewpoint of the Interest Rate Parity Condition, does this situation a. Lie above the IRP Line b. Lie on the IRP Line c. Lie below the IRP Line Pick either A, B or C: II) If the above situation who (if anyone) would benefit from covered interest arbitrage for a 1-year investment, a. European Investors can earn a higher return from covered interest arbitrage compared to investing locally (Investing locally is a European Investor depositing money in European Bank) b. Neither European nor US Investors c. US Investors can earn a higher return from covered interest arbitrage compared to investing locally (US Investor depositing money in US Bank) Pick either A, B or C
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