Suppose that the spot exchange rate between US dollar and euro is 1 euro =$1.25....
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Suppose that the spot exchange rate between US dollar and euro is 1 euro =$1.25. Use the following interest rates. US interest rate (home interest rate) = 5% European interest rate=9% 1) Find the forward exchange rate if the IRP holds. Show your work. 2) If you (US investor) invests $5,000 in the European market under the assumption that the IRP does not hold and then, finally make a 6% arbitrage return a year later, what should the forward rate be today? Show your work
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