The short-term interest rate on Sylvanias silvo currency is 1.0% while the short-term interest rate...
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The short-term interest rate on Sylvanias silvo currency is 1.0% while the short-term interest rate on Freedonias freedo currency is 9.0%. In the spot market, one silvo buys two freedos. If interest rate parity holds, how many freedos can we expect to buy with one silvo 12 months from today? The 12-month futures contract for silvos is trading at US$0.7400; the same contract on freedos is trading at US$0.3425. If you cover a currency carry trade position with futures, is there an opportunity to profit? If so, exclusive of leverage and transactions costs, what is your annual rate of return? Show how you arrived at your answer.
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