18. Integrating CIP and IFE. Assume the following information is available for the U.S. and Europe:
Nominal interest rate U.S. 4% Europe 6%
Expected inflation U.S. 2% Europe 5%
Spot rate —– Europe $1.13
One-year forward rate —– Europe $1.10
a. Does CIP hold?
b. According to PPP, what is the expected spot rate of the euro in one year?
c. According to the IFE, what is the expected spot rate of the euro in one year?
aBorrow E 1500Buy $ 1327 spot using E 1500invest $ 1327 at 4%, and receive 1380.08sell $ 1380.08 forward at 1518.088Arbitrage profit = (1518.088-1500) =$18.088b Purchase power parityS1/S0=…