In the EMS before September 1992, the Italian lira/DM exchange rate could fluctuate by up to 2.25 percent up or down. Assume that the lira/DM central parity and band were set in this way and could not be changed.
What would have been the maximum possible difference between the interest rates on one-year lira and DM deposits?
What would have been the maximum possible difference between the interest rates on six-month lira and DM deposits? On three-month deposits? Do the answers surprise you? Give an intuitive explanation.