Question: Using below information for question 3 Current spot rate EUR1 = USD 1.55 Annual interest rate in EU: 4% Annual interest rate in US: 1%

Using below information for question 3

Current spot rate EUR1 = USD 1.55

Annual interest rate in EU: 4%

Annual interest rate in US: 1%

Forward rate of EUR1: 1.45

How to perform Covered Interest Arbitrage?

Group of answer choices

Steps to perform arbitrage:

1 - Borrow USD and convert to EUR and Invest EUR to receive 4% interest

2 - Sell EUR forward (same as Buy USD forward)

3 - After 1 year, receive EUR and sell it to get USD according to forward contract

4 - Take USD to pay off the loan. There will be profit in USD

Steps to perform arbitrage:

1 - Borrow EUR and convert to USD and Invest USD to receive 1% interest

2 - Sell USD forward (same as Buy EUR forward)

3 - After 1 year, receive USD and sell it to get EUR according to forward contract

4 - Take EUR to pay off the loan. There will be profit in EUR

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