Question 3: The table below shows the information for exchange rates, interest rates and inflation rates in the US and Germany. Answer the following questions

Current spot rate: $1.40/

One-year forward rate: $1.45/

Interest rate in the US: 3%

Interest rate in Germany: 5%

Inflation rate in the US:2%

Inflation rate in Germany: 4%

(b) Find the 1-year forward exchange rate in $ per that satisfies IRP (interest rate parity) from the perspective of a customer that borrowed $1000 traded for at the spot and invested in Germany. (3 marks)

(c)There is one profitable arbitrage at these prices. How to conduct the covered interest arbitrage if you can either borrow $1000 in the US or 1000 in Germany?What would be the profit?

(d)Explain how the IRP (interest rate parity) will be restored as a result of covered arbitrage activities. (3 marks)

(g) Is it the forecasted by IFE future spot rate (in (f) above) the same as the one forecasted by relative PPP (in (e) above) ?If yes, why so, if no, why not?