Interest rate parity and interest arbitrage theories, Financial Econometrics

Below is information about the spot and forward rates for three currencies against the US dollar (USD):

1489_Interest Rate Parity and Interest Arbitrage Theories.png

(a) Critically discuss the interest rate parity and covered interest arbitrage theories. 

(b) Discuss the conditions for interest rate parity theory to hold. 

(c) Use the spot exchange rates to check if interest rate parity holds or not, given the following six-month interest rates: 

United States                         5.60 per cent 

Euro area                              3.40 per cent 

Japan                                    1.00 per cent 

Britain                                   5.25 per cent

Posted Date: 3/22/2013 6:22:17 AM | Location : United States

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