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 = 5%. The one-year forward exchange rate is $1.20 = 1.00; what must the spot rate be to eliminate arbitrage opportunities? (Please show/ explain how to arrive at this answer in the simplest way possible.)

a.$1.1657 = 1.00

b.$1.2353 = 1.00

c.$1.2471 = 1.00

d.$1.2516 = 1.00

Ans: B