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5. Suppose that the two-months interest rate is 6.0 percent per annum in the United States and 7.0 percent per annum in Germany, and that
5. Suppose that the two-months interest rate is 6.0 percent per annum in the United States and 7.0 percent per annum in Germany, and that the spot exchange rate is $1.12/ and the forward exchange rate, with two-months maturity, is $1.10/. Assume that an arbitrager can borrow up to $1,000,000 or 892,857.
a) What kind of arbitrage is possible?
b) Determine the arbitrage profit that can be made.
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