1. Ana Smith does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 12 percent, while one-year interest rates in the U.S. are 5 percent. Ana converts $100,000 to euros and invests them in France. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.28.
If the spot rate of the euro in one year is $1.08, what is Ana’s percentage return from her strategy?
8.15%
-5.50%
-94.50%
108.15%
None of the above
2. Continued from Question 1, what must the spot rate of the euro be in one year for Ana's strategy to be successful?
The spot rate must be above $1.08 per euro.
The spot rate must be above $1.20 per euro.
The spot rate must be below $1.20 per euro.
The spot rate must be below $1.08 per euro.