Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 7 percent, while one-year interest rates in the U.S. are 4 percent. Beth converts $100,000 to euros and invests them in Germany. The current spot rate is $1.1350/€. One year later, she plans to convert the euros back to dollars.
A. According to the IFE, what should the spot rate of the euro in one year be?
B. If the spot rate in one year is $1.1925/€, what is Beth's percentage return from her strategy?
C. If the spot rate in one year is $1.0875/€, what is Beth's percentage return from her strategy?
D. What is the minimum spot rate in one year for Beth's strategy to be successful? (Success is defined as a dollar-denominated rate of return 4%)