The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro.
What should be the one-year forward rate in order to prevent any arbitrage?
A) $0.1944/€.
B) $0.1975/€.
C) $0.2000/€.
D) $0.2025/€.
Correct Answer:
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