Suppose that the current spot exchange rate is $0\mathrm{.}81$ per $ and the three$-$month forward exchange rate is $0\mathrm{.}7913$ per $$.$ The Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage

profit in euros. How will you realize a certain profit and size of your arbitrage profit?

Note: Do not round intermediate calculations. Round off the final answer to nearest whole dollar.

How will you realize a certain profit?

Borrow in dollars and invest in euros. Hedge exchange rate risk by selling just

enough euros forward to repay your dollar loan.

Arbitrage profit

three$-$month interest rate is $5\mathrm{.}60$ percent per annum in the United States and $5\mathrm{.}40$ percent per annum in France. Assume that you

can borrow up to $$1,000,000$ or $810,000.$

Required:

a$.$ How will you realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U$.$S$.$

dollars? What will be the size of your arbitrage profit?

b$.$ Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit

in euros. How will you realize a certain profit and size of your arbitrage profit?

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