he currency of the European Union is the Euro (€). Consider a 3.0% annual riskless interest rate in the United States, a 1.0% riskless interest rate inside the Eurozone, a spot exchange rate of 1.117 $ per €, and a futures exchange rate of 1.1140 $ per € for delivery 12 months from now. Claim: If you were to borrow $1,000,000 in the U.S. and put it into riskless securities at the rate above, you would be able to conduct the covered carry trade and earn a risk-free return in excess of $1,000. True or False?
he currency of the European Union is the Euro (€). Consider a 3.0% annual riskless interest rate in the United States, a 1.0% riskless interest rate inside the Eurozone, a spot exchange rate of 1.117 $ per €, and a futures exchange rate of 1.1140 $ per € for delivery 12 months from now. Claim: If you were to borrow $1,000,000 in the U.S. and put it into riskless securities at the rate above, you would be able to conduct the covered carry trade and earn a risk-free return in excess of $1,000. True or False?
Chapter4: Exchange Rate Determination
Section: Chapter Questions
Problem 23QA
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The currency of the European Union is the Euro (€). Consider a 3.0% annual riskless interest rate in the United States, a 1.0% riskless interest rate inside the Eurozone, a spot exchange rate of 1.117 $ per €, and a futures exchange rate of 1.1140 $ per € for delivery 12 months from now.
Claim: If you were to borrow $1,000,000 in the U.S. and put it into riskless securities at the rate above, you would be able to conduct the covered carry trade and earn a risk-free return in excess of $1,000.
True or False?
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