One year interest rates are 10% in the US and 8% in Spain. The spot exchange rate
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Question:
One year interest rates are 10% in the US and 8% in Spain. The spot exchange rate for
the US dollar is $1.1 to the EURO. The 12-month forward rate is $1.2
i) Suggest a way you might profit from the pricing inconsistency that is
presented here, assuming you have do not have any initial investment funds
and you need to borrow.
ii) Will the situation persist forever? Explain your answer in the above context.
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