Problem Set 201
 

1. The covered interest parity condition substitutes the forward exchange rate for the expected exchange rate. The condition is labeled covered because the forward contract assures a certain rate of return (i.e. without risk) on foreign deposits. In the Table below is listed a spot exchange rate, a 90day forward rate, and a 90day money market interest rate in Germany and Canada. Use this info to answer the following questions.
A. What would the US 90day interest rate have to be for the US to have the highest rate of return for a US investor? (Use the exact formulae to calculate the rates of return.)


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