Current one-year interest rates in Europe are 2 percent, while one-year interest rates in the U.S. are 1.6 percent. You convert $100,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.28.
According to the IFE, what should the spot rate of the euro in one year be?
If the spot rate of the euro in one year is $1.20, what is your percentage return from your investment?
If the spot rate of the euro in one year is $1.35, what is your percentage return from your investment?
What must the spot rate of the euro be in one year for your strategy to be successful?