Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U.S....

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Current one-year interest rates in Europe is 4 percent, whileone-year interest rates in the U.S. is 2 percent. You convert$200,000 to euros and invests them in France. One year later, youconvert the euros back to dollars. The current spot rate of theeuro is $1.20.
a. According to the IFE, what should the spot rate of the euroin one year be?
b. If the spot rate of the euro in one year is $1.12, what isyour percentage return from your investment?
c. If the spot rate of the euro in one year is $1.31, what isyour percentage return from your investment?
d. What must the spot rate of the euro be in one year for yourstrategy to be successful?

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4.4 Ratings (850 Votes)

a Borrow 200000 at 2 for one year Amount in dollars 200000 Current Spot Rate of the Euro 120 Amount in Euro 200000120 1666666667 One year Rate of Interest in See Answer

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Current one-year interest rates in Europe is 4 percent, whileone-year interest rates in the U.S. is 2 percent. You convert$200,000 to euros and invests them in France. One year later, youconvert the euros back to dollars. The current spot rate of theeuro is $1.20.a. According to the IFE, what should the spot rate of the euroin one year be?b. If the spot rate of the euro in one year is $1.12, what isyour percentage return from your investment?c. If the spot rate of the euro in one year is $1.31, what isyour percentage return from your investment?d. What must the spot rate of the euro be in one year for yourstrategy to be successful?