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IFE. Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5%, while one-year interest rates in the United States are 3%. Beth converts $100 000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The cur- rent spot rate of the euro is $1.10.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.00, what is Beth's percentage return from her strategy?

c. If the spot rate of the euro in one year is $1.08, what is Beth's percentage return from her strategy?

d. What must the spot rate of the euro be in one year for Beth's strategy to be successful?

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Financial Management, Finance

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