Zoe Bezos, Italian investor plan to borrow €5,000,000 to invest in Sabah, Malaysia for three months. He was given that one-year interest rate is 5% in Italy and 7% in Malaysia. Spot rate is MYR4.60/€ and forward rate for 1 month, 3 months and 6 months are MYR4.65/€, MYR4.67/€ and MYR4.69/€ respectively.

(i) Is interest rate parity (IRP) hold?

(ii) If the IRP is not holding, how does Zoe Bezos make profit from this investment? Should Zoe Bezos invest in Sabah, Malaysia?

Answer rating: 100% (QA)

To determine if interest rate parity IRP holds we need to compare the interest rate differentials between the two countries with the forward exchange ... View the full answer