Dallas Co. has determined that the interest rate on euros


Question Description:

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Dallas Co. has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for one-year Treasury bills. The one-year forward rate of the euro has a discount of 7 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using covered interest arbitrage than by investing in U.S. Treasury bills? Explain.

Answer

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