1) Assume that the eurozone risk free interest rate n bonds with one year to maturity is 4.78 percent and the U.S. risk free rate on one year bonds is 3.15 percent. The currenct exchangerate is $0.90 per euro. assume the US is the domestic country.
A) calculate the one year forward exchange rate
B) Is the euro trading at forward premium or discount?
C) Is your answer to part b consistent with the interest rate parity? Explain.
2) Take the case of a US firm that wishes to invest some funds (US dollars) for a period of one year. The choice is between investing in a US bond with one year to maturity, paying an interest rate of 2.75 percent and a U.K. bond with one year to maturity, paying an interest rate of 4.25 percent. The currenct exchange rate is $1.46 per pound and the one year forward exchange rate is $1.25 per pound. Should the US firm invest in US bond or UK bond? Explain
3) Consider a German firm taht wishes to invest euro funds for a period of one year. the firm has a choice of investing in a euro bond with one year to maturity, paying an interest rate of 3.35 percent and U.S. dollar bond with one year to maturity, paying an interest rate of 2.25 percent. The current exchange rate is euro 1.25 per dollar. Should the german firm invest in euro bond or in the US bond? Explain