A U.S. investor and an Italian investor are considering investments in the U.S. and the Eurozone....

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Economics

A U.S. investor and an Italian investor are consideringinvestments in the U.S. and the Eurozone. Both investors are quotedthe following rates from their banks:
Spot exchange rate(e_$/â‚¬):Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $1.10/â‚¬
One-year forward rate(f_$/â‚¬):Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $1.06/â‚¬
One-year interest rate on dollars(i_$):Â Â Â Â Â Â Â Â Â Â Â 3.0%
One-year interest rate on euros(i_â‚¬):Â Â Â Â Â Â Â Â Â Â Â Â Â 5.0%
Does Covered Interest Rate Parity hold given the rates quotedabove?
Should the U.S. investor make a one-year covered investment ineuros or simply invest in dollars?
Should the Italian investor make a one-year covered investmentin dollars or simply invest in euros?
If Uncovered Interest Rate Parity holds, what is the spot rateexpected in one year?

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3.7 Ratings (356 Votes)

A Interest rate parity is a noarbitrage condition in which there is no possibility of gaining money and the end result being indifferent to choice of where the money is invested in and the exchange rate risk is hedged against a forward rate or 1iUS1iEU FS Since inserting the values from the question we have 103105106110 which is See Answer

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