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?

Question

Quizplus · Accepted Answer

The correct answer is A because the interest rate parity condition states that the expected return on a one-year investment in Italy should be equal to the expected return on a one-year investment in the United States, taking into account the exchange rate. In this case, the expected return on a one-year investment in Italy is 3.0 percent, and the expected return on a one-year investment in the United States is 1.2833 percent.

Suppose That the One-Year Interest Rate Is 3