Question 20 (4 points) Question 20 Unsaved Suppose that the one-year interest ra

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Question 20 (4 points) Question 20 Unsaved
Suppose that the one-year interest rate is 7.51% in Italy, the spot exchange rate is $1.5507/€1.00, and the one-year forward exchange rate is $1.5822/€1.00. Based on interest rate parity, what must the one-year interest rate be in the United States?
Question 20 options:

7.464%

5.370%

9.694%

5.096%

1.991%

9.666%

Question 21 (4 points) Question 21 Unsaved
Suppose that the one-year interest rate is 5.52% in Italy, the spot exchange rate is $1.5726/€1.00, and the one-year forward exchange rate is $1.5254/€1.00. Based on interest rate parity, what must the one-year interest rate be in the United States?
Question 21 options:

8.076%

3.094%

14.935%

12.299%

8.785%

2.353%

Question 22 (4 points) Question 22 Unsaved
A currency dealer can borrow $1,450,000 (or the equivalent in euros) for one year. The one-year interest rate is 4.30% in the U.S. and 8.40% in the euro zone. The spot exchange rate is $1.2936/€1.00 and the one-year forward exchange rate is $1.2577/€1.00. What arbitrage profit results if the trader borrows the maximum available funds?
Question 22 options:

$15,829.39 OR €12,585.98

$78,401.94 OR €62,337.55

$59,450.00 OR €47,268.82

$20,261.62 OR €16,110.06

$107,410.66 OR €85,402.45

$12,585.98 OR €10,007.14

Question 23 (4 points) Question 23 Unsaved
A currency dealer can borrow $1,400,000 (or the equivalent in euros) for one year. The one-year interest rate is 6.80% in the U.S. and 4.20% in the euro zone. The spot exchange rate is $1.2128/€1.00 and the one-year forward exchange rate is $1.2597/€1.00. What arbitrage profit results if the trader borrows the maximum available funds?
Question 23 options:

$77,688.53 OR €61,672.25

$36,400.00 OR €28,895.77

$9,850.03 OR €7,819.35

$100,995.09 OR €80,173.92

$15,887.14 OR €15,887.14

$20,013.03 OR €15,887.14

Question 24 (4 points) Question 24 Unsaved
Suppose that the one-year interest rate is 4.71% in the United States and 4.17% in Germany. The spot exchange rate is $1.3954/€1.00. What should the one-year forward rate be to preclude arbitrage profits?
Question 24 options:

$1.4026/€1.00

$1.3882/€1.00

$1.4611/€1.00

$1.4536/€1.00

$1.6014/€1.00

$1.2341/€1.00

Question 25 (4 points) Question 25 Unsaved
Suppose that the one-year inflation rate is 2.64% in the United States and 3.20% in Germany. The spot exchange rate is $1.2811/€1.00. What should the one-year forward rate be according to relative purchasing power parity?
Question 25 options:

$1.2742/€1.00

$1.2881/€1.00

$1.3149/€1.00

$1.3221/€1.00

$1.2041/€1.00

$1.4278/€1.00

Explanation / Answer

According to interest rate parity:

F = S * ((1 + if) / (1 + id)).

Where:

id is the interest rate in the domestic currency or the base currency.

if is the interest rate in the foreign currency or the quoted currency.

S is the current spot foreign exchange rate.

F is the forward foreign exchange rate.

Now here :
1.5822=1.5507*(1+USrate)/(1+Italyrate)
1.5822=1.5507*(1+USrate)/(1.0751)
=9.694%

Third option is correct

21)

Using the above formula:
=1.5254/1.5726*1.0552
rate = 2.353%

Last option is correct

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