The $/euro spot exchange rate is $1.1380 per euro. The 6-month forward exchange rate is 1.1385. The dollar interest rate is 2% per year continuously compounded. What should be the continuously compounded euro interest rate per year to exclude arbitrage opportunity? a. 1.81% b. 1.91% c. 1.95% d. 2.00% e. 2.19% Solution Answer: By Fisher effect we have: 1.1385 = 1.1380 x 1.02/ ( 1+ r%) solving for r we get: 1 + r% = 1.0195 therefore r = 0.0195 or 1.95%.