A. A firm based on a Eurozone country exported goods worth $4,100,000 to be paid in 10 months. The exporter wishes to protect herself against financial losses (hedge the receipt) in the forward market. The following information is available: spot exchange rate, $ = 0.8, interest rate in the US, = 1.35%, interest rate in the Eurozone, = 4.07%. Assuming that the Covered Interest-rate Parity condition holds, calculate the gain/loss of the Eurozone exporter if the euro spot rate $ :

i) declines by 8%, (Mark 0.5) ii) increases by 15%, or (Mark 0.5) iii) remains unchanged over the next 10 months. (Mark 0.5) B. Lets consider today that you noticed the following exchange rate quotations in the stock markets of New York and Frankfurt: $ = 0.830, = 0.661 and $ = 0.792. i) Calculate if there is any opportunity for arbitrage.

) ii) If there is an arbitrage opportunity, what steps would you take to make an arbitrage profit, and how would be the profit if you have $1,000,000 available for this purpose.

iii) What happens if you initially sell US dollars for euros?