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Question
The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S. and 8 percent in France. An AA-rated U.S. financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market. The current spot rate is $0.20/Euro.
What should be the spot rate in order for no arbitrage to take place, assuming the one-year forward rate is $0.1975/€?
A. $0.1944/€.
B. $0.1975/€.
C. $0.2000/€.
D. $0.2025/€.
E. $0.2031/€.
Answer
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