3. (20 points) A BMW X3 (xDrive 28i) sells in Germany for EUR51,100. The same BMW X3 can be purchased in the US for USD41,250. The EUR/USD exchange rate is 0.83.

a) How much USD would one have to pay for the BMW X3 if purchased in Germany?

b) What is the real exchange rate between the USD and the EUR?

c) Is the EUR undervalued or overvalued? By how much?

d) If the BMW X3 could be purchased in US and sold in Germany, assuming no transaction costs, how much of an arbitrage profit could be earned in dollars?

e) What should be the exchange rate for such of an arbitrage opportunity not to exist?