Activity 6
Ivette Morillas Flotats
1
Activity 6 – International Parity Relationship
Question
1
2
3
4
5
6
7
8
Answers
C
A
B
D
C
B
A
B
1. Suppose that the one-year interest rate is 5.0 percent in the United States; the spot
exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must one–
year interest rate be in the euro zone to avoid arbitrage?
A. 5.0%
B. 6.09%
C. 8.62%
D. None of the above
2. Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is
$1.20/€, and the one-year forward exchange rate is $1.18/€. What must one-year interest rate
be in the United States?
A. 1.2833%
B. 1.0128%
C. 4.75%
D. None of the above
3. Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in
Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate,
is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000.
A. This is an example where interest rate parity holds.
