IFE. Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.
According to the IFE, what should the spot rate of the euro in one year be?
a. If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy?
b. If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy?
c. What must the spot rate of the euro be in one year for Beth’s strategy to be successful?