IFE Beth Miller does not believe that the IFE holds. Current one-year interest rates in Europe are 5 percent, whereas one-year interest rates in the United States are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10. According to the IFE, what should the spot rate of the euro in one year be? If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy? If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy? What must the spot rate of the euro be in one year for Beth’s strategy to be successful?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 8, Problem 24QA
Textbook Problem

IFE Beth Miller does not believe that the IFE holds. Current one-year interest rates in Europe are 5 percent, whereas one-year interest rates in the United States are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.

  1. According to the IFE, what should the spot rate of the euro in one year be?
  2. If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy?
  3. If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy?
  4. What must the spot rate of the euro be in one year for Beth’s strategy to be successful?

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