Nance is asked to calculate the one-year forward USD/EUR rate that would preclude profits from covered interest arbitrage between the U.S. dollar and the Euro? A. USD/EUR 0.7925. B. USD/EUR 0.8082. C. USD/EUR 0.8073.
Interest rate parity implies that, in order to prevent covered interest arbitrage, the one-year forward USD/EUR rate should be equal to $0.8000(1.10) / (1.09) = $0.8073.
