What is the one-year forward rate that should prevail

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Reference no: EM131907191

1 - Suppose that the one-year interest rate is 5.0 % in the United States; the spot exchange rate is $1.20/€; an d the one-year forward exchange rate is $1.14/€. What must one-year interest rate be in the euro zone so that covered interest parity (CIP) holds?

2 - Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.17/€. What must one-year interest rate be in the United States, assuming CIP holds?

3 - As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 6% in the euro zone. What is the one-year forward rate that should prevail?

Given the following answer: 4, 5, & 6

		Interest Rates
Spot	$1.60/ € 1.00	i_$ = 2%
1 year Forward	$1.58/ € 1.00	i_€ = 4%

4 - If you borrowed €1,000,000 for one year, how much money would you owe at maturity?

5 - If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

6 - If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?

7 - If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?

Reference no: EM131907191

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