The exchange rate now is EUR 1 = USD 1.1977114. The risk-free rate in US is 0.06% per annum. The risk free rate for Euro is -0.69% per annum. The 8-month futures exchange rate in the market is EUR 1 = USD 1.2100000.

a) Compute the 8-month futures exchange rate according to the Interest Rate Parity model. The futures exchange rate is (rounded to 6 decimal places)1.

b) Given the 8-month futures exchange rate in the market, how can you arbitrage from the market? Answer choices:

1) Short the futures, borrow USD now.

2) Short the futures, borrow EUR now.

3) Long the futures, borrow USD now.

4) Long the futures, borrow EUR now

Type your answer choice here (1, 2, 3, or 4):2.

c) Suppose the 8-month futures exchange in the market is correct, holding all other variables constant,

i) Suppose the Euro risk-free rate is correct, what is the USD risk-free rate implied by the Interest Rate Parity model? The implied risk-free rate is (rounded to 4 decimal places)3.

ii) Suppose the USD risk-free rate is correct, what is the Euro risk-free rate implied by the Interest Rate Parity model? The implied risk-free rate is (rounded to 4 decimal places)4.

Answer rating: 100% (QA)

Solving Interest Rate Parity Problem a Futures Rate according to Interest Rate Parity IRP Convert an... View the full answer