4. Investors expect that the exchange rate between the euro and the US dollar will change from 1 euro = $1.22 to 1 euro = $1.15. Show what investors (European or US investors) make arbitrage profits. Assume that the interest rate for both markets is 6. You may choose any amount for the initial investment Ex) You expect the value of to increase from $1.10 to $1.30 over the next year. (e strengthens) The interest rate for the European monket is 4% aut the interest rate for the US inankat is 6%. Home country Arbitrage strategy if you expectation is correct Invest &1m in the European market. @ Buy & for Elm today at t1 - $1.10 tqoq, 090.91 Invest 909,090.91 in the Europeen market at 4%.. Future balance in a year - 909.040.91(1,04) - 1945, 454.55 Repurchase $ for 945 454,55 130. -> 945,454.55 v1.3 - $ 229,090.92 Investment returna 1229, 0.92 - 1000 1m 1.10 10035 (22.9% Arbitrage return 92.91% - 6%. = (16.912