1. Assume the following information:
You have $2,000,000 (US dollars) to invest:
Current spot rate of euro = $1.30
1-year forward rate of euro = $1.25
1-year deposit rate in U.S. = 11%
1-year deposit rate in Europe = 14%
If you use covered interest arbitrage for a 1-year investment, what will be the amount of U.S. dollars you will have after one year?
-$2,192,307.69.
-$2,371,200.00.
-$3,672,500.00.
-$1,403,076.92.
2. Continued from Question 22, does the cover interest arbitrage work for you as a U.S. investor? And does Interest Parity hold under the current market condition presented in Question 1?
-Yes, the covered interest arbitrage works for the U.S. investor because the yield is higher than 11% earned by investing in U.S. Thus, the interest rate parity does not hold.
-No, the covered interest arbitrage does not work for the U.S. investor because the yield is lower than 11% earned by investing in U.S.. However, the interest rate parity does not hold, either.
-No, the covered interest arbitrage does not work for the U.S. investor because the yield is lower than 11% earned by investing in U.S.. Thus, the interest rate parity does not hold, either.
-Yes, the covered interest arbitrage works for the U.S. investor because the yield is higher than 11% earned by investing in U.S. However, the interest rate parity holds.