Covered Interest Parity 

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Covered Interest Parity

The Euro (EUR) spot exchange rate against the U.S. Dollar (USD) was 1.2834 USD/EUR on March 30, 2010 while the 6-month forward exchange rate was 1.2779 USD/EUR. On the same day, the Wall Street Journal reported the 6-month Eurodollar (USD denominated deposits located in Europe) interest rate as 3.125 % per annum, compounded annually. What was the effective Euro deposit interest rate for 6-months, in percent per annum? Ignore bid/ask spreads. Hint: you will need to convert the compounding frequency from 1-year to 6-months (please look up the compound interest formulas on your own if you forgot).

 
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