Using the information in Table, determine whether the three-month forward rate on euros is fair if the

Question:

Using the information in Table, determine whether the three-month forward rate on euros is fair if the annualized yield for risk-free borrowing over the next three months is 8% in Europe and 5% in the United States. If the price is not fair, how could you capitalize on the arbitrage opportunity? What is the potential profit? Assume monthly compounding for borrowing and lending.

Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...