Use the following information assuming that you are a US investor. Today's forward exchange rate: 1...

Use the following information assuming that you are a US investor.

Today's forward exchange rate: 1 euro = $1.28.

US interest rate is 5%.

EU interest rate is 12%.

a) If the IRP (Interest rate parity) holds, what should the spot exchange rate be today?

b) Assuming that today, you invest $500 in the EU market for one year and at the same time, enter a currency forward contract to sell euro in a year. If today's spot exchange rate is: 1 euro=$1.32, show how much profits or losses you make next year.

Expert Solution

jeff jeffy answered 1 year ago

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