Joan smith does not believe that international fisher effect (IFE) holds. Current one-year interest rate in Europe are 5 % while one-year interest rate in US is 10 %. Joan converts $100,000 to euros and invest them in France. One year later, she coverts Euros back to dollars. The current spot rate of euro is $1.08.
If the spot rate of the euro in one year is $1.12, what is Joan’s percentage return from her strategy?
Continued from the above question what must the spot rate te of the Euro be in one year for Joan’s strategy to be successful?