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Assume that interest rate parity holds. U.S. interest rate is 8% and Euro zone interest rate...

Assume that interest rate parity holds. U.S. interest rate is 8% and Euro zone interest rate is %. The forward rate on euros exhibits a __ of __ percent.

A. premium; 1.85

B. premium; 1.82

C. discount; 1.85

D. discount; 1.82

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Answer #1

Euro will exhibit a discount as Interest rate is higher in Euro zone

% Discount = (1+Interest Rate EuroZone)/(1+Interest rate US) - 1

=(1+10%)/(1+8%) - 1

= 1.85%

Hence, the answer is discount, 1.85

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