Why do we observe that European Countries post different interest rate while the

Question

Why do we observe that European Countries post different interest rate while they are using the same currency, euro. Does this provide us to make an arbitrage profit? If it does, how does the market adjust to prevent it happening? Or, Can we simply not make any arbitrage profit from current situation? If not, explain why we see this differences in interest rate in Europe with same currency.

The answer is no, just need help explaining it using these key terms: Law of one price, Locational Arbitrage, Price Discrimination and default Risk

Explanation / Answer

All countries under Eurozone follow the same currency known as EURO. However these countries have their own country currency also whcih is separate from EURO. Accordingly EURO currency is the currency that is given as valid currency for transacting in these countries.

Difference in the interest rate in the various Eurozone countries is dependent on country's own default risk, balance of payment and economic growth and GDP growth.

Accordingly country specific currency devaluate or appreciate based on the above mentioned factors and interest rate is adjusted accordingly.

Therefore in spite of difference in interest rates, law of one price will prevail (Keeping other factors constant) and there will not be any arbitrage opportunity.

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