Financial Market:
Assume that one euro (EUR) currently costs NOK 8.00 in the spot-market and NOK 7.6500 in the 6- month’s forward market. The current, one-year interest rate on NOK-denominated, government issued money-market securities is 3.25 percent, while the one-year rate on similar, risk-free Euro certificates is 4.00 percent. One-year borrowing rates are 3.40 percent and 4.15 percent, respectively, in NOK and EUR.
(a) Calculate the NOK-return on a one-year NOK 1,000,000 investment in Euro-certificates!
(b) Do the quotes above facilitate currency arbitrage? Briefly explain!
(c) May differential taxation of investment returns in NOK and EUR affect your conclusion regarding currency arbitrage opportunities? Briefly explain!