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Question
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. LIBOR at the end of six months is 5.5 percent. Assume both interest and principal will be reinvested in six months. Assume the spot exchange rate is 1.75/$. What should be the one-year forward rate in order for the bank to earn a spread of 1 percent?
A. €1.7344/$.
B. €1.7418/$.
C. €1.7478/$.
D. €1.7750/$.
E. €1.7842/$.
Answer
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