5. Suppose that the two-months interest rate is 6.0 percent per annum in the United States and 7.0 percent per annum in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with two-months maturity, is $1.10/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857.

a) What kind of arbitrage is possible?

b) Determine the arbitrage profit that can be made.

c) What would the forward rate have to be so that there would be no arbitrage opportunity?

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SOLUTION Given that 1112 Spot Rate Interest rate in US 6 per annu... View the full answer