The current EUR$/$USD spot exchange rate is

$($you need

to buy

$,$ where

euro$).$ The annual interest rate in the Eurozone,

$,$ is

$,$ while the annual rate in the US$,$

$,$ is

$($assume flat term structures$).$

$($a$)(*)$ What should be the two$-$year EUR$/$USD forward exchange rate?

$($Write your final answers in dollars and round to two decimals: for instance, if the answer is $$450\mathrm{.}355$ or $$450\mathrm{.}359,$ write $450\mathrm{.}36$ without the dollar sign; if the answer is $$450\mathrm{.}354$ or $$450\mathrm{.}351,$ write $450\mathrm{.}35.)$

The two$-$year EUR$/$USD forward exchange rate should be: $

$($b$)(**)$ AMB is a new firm trading forward contracts. They are buying and selling the two$-$year EUR$/$USD forward exchange rate, and are quoting a forward exchange rate of

$.$ If you could trade with AMB, how would you devise an arbitrage strategy?

I would

one two$-$year EUR$/$USD forward exchange rate contract.

$($Write "buy from AMB" or "sell to AMB"$)$

I would borrow in the US $

with a maturity of two years.

$($Write dollar amount and round it to two decimals$)$

I would invest in the Eurozone

in a two$-$year zero$-$coupon euro bond.

$($Write euro amount and round it to two decimals$)$

To the investment in the Eurozone, I would convert $

into euro.

$($Write dollar amount and round it to two decimals$)$

With this trading strategy, I would make $($today$)$ an arbitrage profit of $

$.$

$($Write dollar amount and round it to two decimals$)$