ChapterP2: Part 2: Exchange Rate Behavior
Section: Chapter Questions
Problem 1Q
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- An investor has $2m to invest and has the option of placing it in a US bank account paying 2% annually, or in a German bank, where the annual rate of interest is only 2.5%. If the current exchange rate for the Euro is given as $1.4250, at what 1-year Dollar-Euro forward rate of exchange would the investor get the same
return from investing in the US as he/she would by investing in Germany? Please show your work.
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