Assume that you are a retail customer who has the capacity to borrow either 1,000,000 or...

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Assume that you are a retail customer who has the capacity to borrow either €1,000,000 or $1,000,000 for one year. The following exchange rates and annual interest rates apply: Bid Ask So($/E) $1.40 = €1.00 $1.43 €1.00 F360(S/E) $1.44 = €1.00 $1.49 = €1.00 Borrowing is 4.20% APR ie 3.65% APR Lending 4.10% APR 3.50% APR a) Find the 1-year forward BID exchange rate in $ per € ($/€) that satisfies the interest rate parity (IRP). Keep four digits after the decimal place in your solution. (3 marks) b) Describe a profitable arbitrage at these quoted rates. Calculate step-by-step the amount of arbitrage profit that you can make. Keep two digits after the decimal place in your solution. (5 marks) Assume that you are a retail customer who has the capacity to borrow either €1,000,000 or $1,000,000 for one year. The following exchange rates and annual interest rates apply: Bid Ask So($/E) $1.40 = €1.00 $1.43 €1.00 F360(S/E) $1.44 = €1.00 $1.49 = €1.00 Borrowing is 4.20% APR ie 3.65% APR Lending 4.10% APR 3.50% APR a) Find the 1-year forward BID exchange rate in $ per € ($/€) that satisfies the interest rate parity (IRP). Keep four digits after the decimal place in your solution. (3 marks) b) Describe a profitable arbitrage at these quoted rates. Calculate step-by-step the amount of arbitrage profit that you can make. Keep two digits after the decimal place in your solution. (5 marks)

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a To find the 1year forward BID exchange rate in per that satisfies IRP we can plug in the given val... View the full answer