Does the covered interest parity condition hold

Reference no: EM13180600

Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis:

a. Does the covered interest parity condition hold? Why or why not?

b. How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange?

Reference no: EM13180600

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