Answer Happy

2. (10 points) Please use the following information for this question. Exchange Rate Interest Rate Annual % S($/€) F360($/€) $1.25/€ $1.20/€ is ie 2% 5% (a) (2 points) Does covered interest rate parity hold? (Just state your answer – no explanation required.) (b) (2 points) To earn profits via covered interest arbitrage, would you borrow in euros and lend in US$, or borrow in US$ and lend in euros? (Just state your answer – no explanation required.) (c) (4 points) Suppose you are a German investor who cares about profits measured in euros. You can either borrow €1,000,000 or $1,250,000 for one year, what is the profit you can earn via covered interest arbitrage? (d) (2 points) In response to investors carrying out covered interest arbitrage, will is increase or decrease? (Just state your answer – no explanation required.)