Evaluating Interest Rate Parity

Maria is an analyst examining the relationship between interest rates and currency exchange rates between the US dollar (USD) and the euro (EUR). She recalls the concept of Interest Rate Parity (IRP), which states that the forward exchange rate should incorporate the interest rate differential between two countries to prevent arbitrage opportunities.

Maria finds that the current spot exchange rate is 1.10 USD/EUR, and the one-year forward exchange rate is 1.12 USD/EUR. The interest rate in the Eurozone is 0.5%, while that in the United States is 1.5%. Based on this information, she evaluates whether the forward rate reflects the interest rate differential as per the Interest Rate Parity condition.