What should be the one-year forward rate that
Subject: Business / Finance
Question
Suppose the following quotations are available:
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Spot rate
Lit/US$ 1355
Eurocurrency market
Italian Lira = 5.50%
U.S. Dollar = 5.00%
I. What should be the one-year forward rate that will satisfy the Interest Rate
Parity?
II. Suppose the one-year forward rate is Lit/$ 1365 today instead of the
number you obtained in [I].
A. Given the numbers for the Italian interest, spot and forward rates
as above, is the Italian Lira undervalued or overvalued in the
forward market?
(a). UNDERVALUED [ ]
(b). OVERVALUED [ ]
B. [ 2.5 points]
Disregard all the numbers above
Your boss tells you that Italian Lira is overpriced in the forward market. What
would you do to take advantage of the arbitrage opportunity?
