Question: Suppose that the one - year interest rate is 4 . 0 percent in the United States; the spot exchange rate is $ 1 .

Suppose that the one-year interest rate is 4.0 percent in the United States; the spot exchange rate is $1.25/; and the one-year forward exchange rate is $1.16/. What must the one-year interest rate be in the euro zone to avoid arbitrage?

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