Covered Interest Arbitrage in Both Directions Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent. Does interest rate parity exist? Can a U.S. firm benefit from investing funds in Germany using covered interest arbitrage? Can a German subsidiary of a U.S. firm benefit by investing funds in the United States through covered interest arbitrage?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 7, Problem 19QA
Textbook Problem

Covered Interest Arbitrage in Both Directions Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent.

  1. Does interest rate parity exist?
  2. Can a U.S. firm benefit from investing funds in Germany using covered interest arbitrage?
  3. Can a German subsidiary of a U.S. firm benefit by investing funds in the United States through covered interest arbitrage?

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