For the given of Problem 11, indicate:
(a) How much would an interest arbitrageur earn if the foreign currency were at a forward premium of 1 percent per year?
(b) What would happen if the foreign currency were at a forward discount of 6 percent per year?
Problem 11
If the positive interest rate differential in favor of a foreign monetary center is 4 percent per year and the foreign currency is at a forward discount of 2 percent per year, roughly how much would an interest arbitrageur earn from the purchase of foreign three-month treasury bills if he or she covered the foreign exchange risk?