Return Due to Covered Interest Arbitrage Interest rate parity exists between the United States and Poland (its currency is the zloty). The one-year risk-free CD (deposit) rate in the United States is 7 percent. The one-year risk-free CD rate in Poland is 5 percent; it is denominated in zloty. Assume that there is zero probability of any financial or political problem such as a bank default or government restrictions on bank deposits or currencies in either country. Myron is from Poland and plans to invest in the United States. What is Myron’s return if he invests in the United States and covers the risk of his investment with a forward contract?

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 52QA
Textbook Problem

Return Due to Covered Interest Arbitrage Interest rate parity exists between the United States and Poland (its currency is the zloty). The one-year risk-free CD (deposit) rate in the United States is 7 percent. The one-year risk-free CD rate in Poland is 5 percent; it is denominated in zloty. Assume that there is zero probability of any financial or political problem such as a bank default or government restrictions on bank deposits or currencies in either country. Myron is from Poland and plans to invest in the United States. What is Myron’s return if he invests in the United States and covers the risk of his investment with a forward contract?

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