Interest Rate Parity Dallas Co. has determined that the interest rate on euros is 6 percent and the U.S. interest rate for one-year Treasury bills is 3 percent. The one-year forward rate of the euro has a discount of 5 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using covered interest arbitrage than by investing in U.S. Treasury bills? Explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 21, Problem 14QA
Textbook Problem

Interest Rate Parity Dallas Co. has determined that the interest rate on euros is 6 percent and the U.S. interest rate for one-year Treasury bills is 3 percent. The one-year forward rate of the euro has a discount of 5 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using covered interest arbitrage than by investing in U.S. Treasury bills? Explain.

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