Consider a currency trader based in Germany. The current spot exchange rate is 1.1 per $1. The

Question:

Consider a currency trader based in Germany. The current spot is €1.1 per $1. The risk-free rate in the United States is 5 percent per year, and the euro risk-free rate is 8 percent per year. The current forward price on a one-year contract is €1.15 per $1.
a. Calculate the arbitrage-free forward price.
b. Based on the current forward price of €1.15 per $1, indicate how the trader can earn a risk-free arbitrage profit.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...