1a)

	Bid		Ask			Borrowing		Lending
S0($/)		$1.40 = 1.00		$1.43 = 1.00		i$	4.20% APR		4.10% APR
F360($/)		$1.44 = 1.00		$1.49 = 1.00		i	3.65% APR		3.50% APR

In which of these cases your gain is higher in Euros? How much is the actual gain?

(i) If you had 1,000,000, traded them for USD at S₀, invested the dollars in the U.S. for one year, and exchanged your dollars for EUR at F₃₆₀.

(ii) If you had 1,000,000, invested your euros in the eurozone.

1b) Suppose the spot rate on June 1, 2001 was 1.25 = $1.00, and exactly 180 days later the spot rate changed to 1.00 = $1.00. The interest rate in the eurozone was 6%. What is the effective dollar interest rate from the eurozone deposit? Hint: Annualize the rate.

-17.6%

5.75%

28.75%

57.5%