13. Arbitrage: Covered interest 1. 2. 3. 4. 5. STEP: 4 of 5 Suppose you observe that the 90-day interest rate across the eurozone is 5%, while the interest rate in the U.S. over the same time period is 1%. Further, the spot rate and the 90-day forward rate on the euro are both $1.25. You have $500,000 that you wish to use in order to engage in covered interest arbitrage. After 90 days in the bank, you withdraw your 420,000 euros from the bank in the eurozone, and exchange it for dollars to fulfill the forward contract, receiving S ]. This represents a profit of 5 over your initial investment