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Eddi Din [679]
2 years ago
10

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange

Business
1 answer:
Mrac [35]2 years ago
3 0

Answer:

The interest rate for the euro zone to avoid arbitrage has to be C) 8.62%

Explanation:

Hi, we need to solve for r(eur) the following equation in order to find an interest rate that will avoid arbitrage.

Forward=Spot(\frac{1+r(usd)}{1+r(eur)} )

That is:

1.16 =1.20 (\frac{1+0.05} {1+r(eur)} )

(1+r(eur)) =\frac{1.20} {1.16} (1+0.05)

r(eur)=\frac{1.20}{1.16}(1+0.05)-1

r(eur)=0.0862

So, the euro zone rate to avoid arbitrage is 8.62%, which is option C)

Best of luck.

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