Suppose the spot US dollar/euro exchange rate is \(\$ 1.20 / €\), the US risk-free rate is \(4 \%\) (annual) and the rate paid on euros is \(2 \%\).

a. Assuming the IRPT holds, what should the equilibrium 1-year \(\$ / €\) forward rate be?

b. Suppose a US bank provides one of its business customers with a forward contract in which the customer agrees to sell to the bank 12 million euros one year later at a forward price equal to IRPT. Assuming the bank can borrow and lend dollars and euros at the above risk-free rates, explain how the bank would hedge its forward position.

c. Explain the type of forward contract the bank would provide the business customer and how it would hedge the contract if the business customer wanted to buy 12 million euros one year later.