A U.S. investor and a Dutch investor are considering investment in the U.S. and the Eurozone....

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A U.S. investor and a Dutch investor are considering investment in the U.S. and the Eurozone. Both investors are quoted the following rates from their banks: Spot exchange rate: 1.15 dollar per euro One-year forward rate: 1.05 dollar per euro One-year interest rate on dollars: 4% One year interest rate on euros: 9% 1. Based on the spot and forward exchange rate quotes, is the U.S. dollar at a forward premium or discount (i.e. would using forward rate more profitable or less profitable?) Briefly explain your answer, including a calculation of the forward premium or discount if there is one? 2. Should the U.S. investor make a one-year covered investment in euros or simply invest in dollars? Briefly explain your answer. 3. Should the Dutch investor make a one-year covered investment in dollars or simply invest in euros? Briefly explain your answer. 4. Does Covered Interest Rate Parity hold given the rates quoted above? If so, explain why. If not, explain what effects the investment activities in B. and or/C. A U.S. investor and a Dutch investor are considering investment in the U.S. and the Eurozone. Both investors are quoted the following rates from their banks: Spot exchange rate: 1.15 dollar per euro One-year forward rate: 1.05 dollar per euro One-year interest rate on dollars: 4% One year interest rate on euros: 9% 1. Based on the spot and forward exchange rate quotes, is the U.S. dollar at a forward premium or discount (i.e. would using forward rate more profitable or less profitable?) Briefly explain your answer, including a calculation of the forward premium or discount if there is one? 2. Should the U.S. investor make a one-year covered investment in euros or simply invest in dollars? Briefly explain your answer. 3. Should the Dutch investor make a one-year covered investment in dollars or simply invest in euros? Briefly explain your answer. 4. Does Covered Interest Rate Parity hold given the rates quoted above? If so, explain why. If not, explain what effects the investment activities in B. and or/C.

Answer rating: 100% (QA)

1 US dollar is at a forward premium against euro Explanation Spot market rate 115 for 1 that is 1 1115 That is 1 087 rounded off to 2 decimals Forward ... View the full answer