Question 1 (30 marks)

Suppose that the current spot exchange rate is 0.98/$ and the six-month forward exchange rate is 0.9712/$. The six-month interest rate is 2.11 percent per annum in the United States and 4.92 percent per annum in France. Assume that you can borrow up to $1,000,000 or 980,000.

a) Show the steps until you can create a profit via covered interest arbitrage in U.S. dollars. (20 marks)

b) Repeat the above of (a) but you would create a profit in euros. (10 marks)