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Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 5.60 percent per annum in the United States and 5.40 percent per annum in France. Which of the following is going to happen as a result of covered arbitrage activities toward restoring the interest parity condition?

The euro interest rate will fall

The dollar interest rate will fall

The €/$ spot exchange rate will rise

The €/$ forward exchange rate will fall

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92404174

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