Does the covered interest parity condition hold

Reference no: EM132133664

Question: There are conflicting answers to this online. Please, only respond if you are certain of your answers, and can explain. Don't just paste what is already out there. I'm trying to learn.

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:

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

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: EM132133664

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