n 11Suppose that the one-year interest rate is 4.0 percent in the United States: the spot exchange rate isS125/e, and the one-year forward exchange rate is $116/e. What must the one-year interest rate be inedthe eurozone to avoid arbitroge?out ofSelect one:O a 12.07%O b. 6.07%O c.4.0%O d 8.62%

One year US interest rate = 4% Forward Rate = $1.16 Spot Rate = $1.25

Suppose that the one-year interest rate is 4.0 percent in the United States; the spot exchange rate is $1.25/€, and the one-year forward exchange rate is $116/€. What must the one-year interest rate be in the eurozone to avoid arbitrage?

Suppose that the one-year interest rate is 4.0 percent in the United States; the spot exchange rate is $1.25/€, and the one-year forward exchange rate is $116/€. What must the one-year interest rate be in the eurozone to avoid arbitrage?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

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Concept explainers

Currency Market

The currency market, also known as the foreign exchange market, consists of currencies worldwide. This market determines the rate of all currencies based on the buying and selling of forex. It is an over-the-counter market. It is the largest and most liquid market based on trade volume.

Question

n 11
Suppose that the one-year interest rate is 4.0 percent in the United States: the spot exchange rate is
S125/e, and the one-year forward exchange rate is $116/e. What must the one-year interest rate be in
ed
the eurozone to avoid arbitroge?
out of
Select one:
O a 12.07%
O b. 6.07%
O c.4.0%
O d 8.62%

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