A U.S. investor and an Italian investor are consideringinvestments in the U.S. and the Eurozone. Both investors are quotedthe following rates from their banks:
Spot exchange rate(e$/€):                               $1.10/€
One-year forward rate(f$/€):                         $1.06/€
One-year interest rate on dollars(i$):Â Â Â Â Â Â Â Â Â Â Â 3.0%
One-year interest rate on euros(i€):             5.0%
- Does Covered Interest Rate Parity hold given the rates quotedabove?
- Should the U.S. investor make a one-year covered investment ineuros or simply invest in dollars?
- Should the Italian investor make a one-year covered investmentin dollars or simply invest in euros?
- If Uncovered Interest Rate Parity holds, what is the spot rateexpected in one year?
