1. Assume the following information:

You have $2,000,000 (US dollars) to invest:

Current spot rate of euro = $1.30

1-year forward rate of euro = $1.25

1-year deposit rate in U.S. = 11%

1-year deposit rate in Europe = 14%

If you use covered interest arbitrage for a 1-year investment, what will be the amount of U.S. dollars you will have after one year?

-$2,192,307.69.

-$2,371,200.00.

-$3,672,500.00.

-$1,403,076.92.

2. Continued from Question 22, does the cover interest arbitrage work for you as a U.S. investor? And does Interest Parity hold under the current market condition presented in Question 1?

-Yes, the covered interest arbitrage works for the U.S. investor because the yield is higher than 11% earned by investing in U.S. Thus, the interest rate parity does not hold.

-No, the covered interest arbitrage does not work for the U.S. investor because the yield is lower than 11% earned by investing in U.S.. However, the interest rate parity does not hold, either.

-No, the covered interest arbitrage does not work for the U.S. investor because the yield is lower than 11% earned by investing in U.S.. Thus, the interest rate parity does not hold, either.

-Yes, the covered interest arbitrage works for the U.S. investor because the yield is higher than 11% earned by investing in U.S. However, the interest rate parity holds.