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Calculate the covered interest-rate differential

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Suppose that the euro-dollar spot exchange rate, Et , is 1.5 dollars per euro, that the forward exchange rate, Ft , is 2 dollars per euro, that the nominal interest rate in the United States is 3 percent, and the nominal interest rate on euro deposits in Frankfurt is 1 percent. Assume further that with probability 0.5 Et+1 is 2 and with equal probability it equals 1.

Problem 1. Calculate the covered interest-rate differential.

Problem 2. Calculate the uncovered interest-rate differential.

Problem 3. Calculate the forward discount.

Problem 4. Suppose a carry trade investor decides to invest 1 million dollars. How much money would she make or lose under each of the two possible realizations of Et+1?

Reference no: EM132796785

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