Exchange rate between the U.S. dollar and the German mark / covered interest parity
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The spot exchange between the U.S. dollar and the German mark is $.5500/DM. The dollar deposit rate is 8% and the DM deposit rate is 4%.
a. What is the interest parity? what is the six month forward rate if the covered interest parity holds?
b. What is the unbiased forward rate hypothesis? If the unbiased forward rate hypothesis holds, what do you expect the spot rate between the U.S. dollar and the German mark to be in six months
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The solution finds the exchange rates between the U.S dollar and the German mark/covered interest parity.
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a. What is the interest parity? what is the six month forward rate if the covered interest parity holds?
Interest rate parity is an arbitrage condition, which says that the returns from borrowing in one currency, exchanging that currency for another currency and investing in interest-bearing instruments of the second currency, while simultaneously purchasing futures contracts to convert the currency ...
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