A currency dealer has good credit and can borrow

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24) A currency dealer has good credit and can borrow either \$1,000,000 or €800,000 for oneyear. The one-year interest rate in the U.S. isi\$= 2% and in the euro zone the one-year interestrate isi= 6%. The one-year forward exchange rate is \$1.20 = €1.00; what must the spot rate beto eliminate arbitrage opportunities?A) \$1.2471 = €1.00B) \$1.20 = €1.00C) \$1.1547 = €1.00D) none of the optionsAnswer:A
Explanation:Solve the following forX: (1.06/1.02) × 1.2 =XTopic:Interest Rate Parity and Exchange Rate Determination
25) Will an arbitrageur facing the following prices be able to make money?BorrowingLendingBidAsk\$5%4.5%Spot \$1.00 = €1.00\$1.01 = €1.006%5.5%Forward \$0.99 = €1.00\$1.00 = €1.00C
Topic:Reasons for Deviations from Interest Rate Parity26) If IRP fails to hold,DTopic:Reasons for Deviations from Interest Rate Parity
Accessibility:Keyboard Navigation27) Although IRP tends to hold, it may not hold precisely all the timeDTopic:Reasons for Deviations from Interest Rate Parity
Accessibility:Keyboard Navigation28) The interest rate at which the arbitrager borrows tends to be higher than the rate at which helends, reflecting theA) transaction cost paradigm.B) midpoint.C) bid-ask spread.D) none of the optionsAnswer:CTopic:Reasons for Deviations from Interest Rate Parity
Accessibility:Keyboard Navigation29) Governments sometimes restrict capital flows, inbound and/or outbound. They achieve this
objective by means ofC
Topic:Reasons for Deviations from Interest Rate ParityAccessibility:Keyboard Navigation

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