Suppose five-year deposit rates on Eurodollars and Euro marks are 12% and 8%,respectively.If the current spot rate for the mark is $0.50,then the spot rate for the mark five years from now implied by these interest rates is

Question

Quizplus · Accepted Answer

To find the spot rate for the mark five years from now, we can use the interest rate parity formula:

(1 + RF) = (1 + RD) x (S0/F)

Where RF and RD are the annual interest rates on foreign and domestic currencies respectively, S0 is the spot exchange rate, and F is the forward exchange rate.

In this case, we are given that RF = 8%, RD = 12%, S0/M = $0.50, and we want to solve for S5/M.

Plugging in the numbers, we get:

(1 + 0.08) = (1 + 0.12) x ($0.50/S5)

Solving for S5, we get:

S5 = $0.5997

Therefore, the answer is choice A).

Suppose Five-Year Deposit Rates on Eurodollars and Euro Marks Are