Connecticut Co. plans to finance its operations in the U.S. It can borrow euros on a short-term
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Connecticut Co. plans to finance its operations in the U.S. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs short term financing?
a. Assume that Connecticut Co. needs dollars. It borrows euros at a lower interest rate than that for dollars. If interest rate parity exists and if the forward rate of the euro is a reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
b. If Connecticut Co. expects the spot rate to be a more reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
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ab The firm could consider borrowing a foreign currency and ...View the full answer
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