Suppose that the one-year interest rate is 3.0 percent in Italy,the spot exchange rate is $1.20/€,and the one-year forward exchange rate is $1.18/€.What must the one-year interest rate be in the United States?
A)1.2833%
B)1.0128%
C)4.75%
D)none of the options

Question

Quizplus · Accepted Answer

Using the interest rate parity formula: (1 + i_US) = (1 + i_Italy) * (Forward Rate / Spot Rate). Plugging in the values: (1 + i_US) = (1 + 0.03) * (1.18 / 1.20), we find i_US ≈ 0.012833 or 1.2833%.

Suppose That the One-Year Interest Rate Is 3