Answer: 3.42%

Using covered interest rate parity with **continuous compounding**: \[ \ln\left(\frac{F}{S}\right) = (r_{US} - r_{EUR})T \] Given: - \(S = 1.40\) - \(F = 1.35\) - \(T = 1.5\) years - \(r_{US} = 1.00\%\) Compute: \[ \ln(1.35/1.40) = \ln(0.9642857) \approx -0.03637 \] \[ \frac{-0.03637}{1.5} \approx -0.02424 = 0.01 - r_{EUR} \] So: \[ r_{EUR} \approx 0.01 + 0.02424 = 0.03424 = 3.42\% \] Thus the correct answer is **D**. **Bonus (discrete compounding):** \[ \frac{F}{S} = \frac{(1+r_{US})^{1.5}}{(1+r_{EUR})^{1.5}} \] Solving gives an implied Eurozone rate of about **3.47%**, which is close to the continuous-compounding result.

Author: Manit Arora