Current one-year interest rates in Europe is 2 percent, while one-year interest

Question

Current one-year interest rates in Europe is 2 percent, while one-year interest rates in the U.S. is 1.5 percent. You convert $100,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.28.  

a. According to the IFE, what should the spot rate of the euro in one year be?
b. If the spot rate of the euro in one year is $1.20, what is your percentage return from your investment?
c. If the spot rate of the euro in one year is $1.35, what is your percentage return from your investment?
d. What must the spot rate of the euro be in one year for your strategy to be successful?

Explanation / Answer

a. According to the IFE, what should the spot rate of the euro in one year be?

Solution

ef=(1+ik) /(1+if)-1

ef=(1.015) / (1.02)-1

ef= -.490%

If the IFE holds euro should depreciate by .490 percent in one year.

Spot rate of $1.28

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.