1)A currency dealer has good credit and can borrow either $1,000,000 or 800,000 for one year. The one-year interest rate in the U.S. is i$= 2% and in the euro zone the one-year interest rate is i= 6%. The spot exchange rate is $1.25 = 1.00 and the one-year forward exchange rate is $1.20 = 1.00. Show how to realize a certain profit via covered interest arbitrage.

A.Borrow 800,000 at i= 6%; translate to dollars at the spot, invest in the U.S. at i$= 2% for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00. Net profit $2,400.

B.Borrow 800,000 at i= 6%; translate to dollars at the spot, invest in the U.S. at i$= 2% for one year; translate 850,000 back into euro at the forward rate of $1.20 = 1.00. Net profit 2,000.

C.Borrow $1,000,000 at 2%. Trade $1,000,000 for 800,000; invest at i= 6%; translate proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600.

D.Borrow 800,000 at i= 6%; translate to dollars at the spot, invest in the U.S. at i$= 2% for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00. Net profit is $2,400. Additionally, one may borrow 800,000 at i= 6%; translate to dollars at the spot, invest in the U.S. at i$= 2% for one year; translate 850,000 back into euro at the forward rate of $1.20 = 1.00. Net profit is 2,000.

1)Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/ and the forward exchange rate, with one-year maturity, is $1.16/. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?

A) $21,964.29B) $46,207C) $10,690D) $15,000

Suppose the spot direct quotes for the pound sterling and euro are $1.398189 and $.123033, respectively. What is the direct quote for the pound in Paris?

a)1.1339-73/

b).8793-.8819/

c).080812/

d).097687/

(What is the meaning by $1.398189 and $.123033) and how to calculate the question.

Suppose the quote for euro is $.986592/. The percent spread is

a)2.31%

b)0.97%

c)0.62%

d)0.27%

(I dont know how to use $.986592/ to calculate the percent spread)