1. What is the central bank likely to undertake and how will this affect the value of the euro? 

2. Without using an exchange rate model, what is your prediction for the one year forward rate given the likely action of Germany's central bank, all things being equal?

3. Using the interest rate parity equation, was your prediction correct? What should the forward rate be? 

4. Based on the one-year forward rate you predicted, which investor is likely to benefit from covered interest arbitrage? 

5. Compute the profit and yield to the investor who stands to benefit from covered interest arbitrage.  

Assume the following information:

1 - year U.S. interest rate = 3%

1- year  German interest rate = 6%

Spot rate of euro = $1.09

Answer rating: 100% (QA)

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