(a)A U.S. company must pay 30 million euros to a European supplier in 3 months.The company wishes to lock in the dollar price of this payment using existing exchange rates.The spot rate is $1.215, the 3-month forward rate is $1.23, the interest rate in New York is 10 percent, and the interest rate in Europe is 7 percent.What is the lowest dollar cost of covering the payment in 90 days?

You can borrow or invest in New York at 7 percent and in Paris at 13 percent.The spot euro is $1.215 and the 3-month forward euro is $1.23.Will covered-interest-arbitrage be profitable?If so, explain the sequence of profitable transactions?

(d)A U.S. bank expects the 3-month interest rate in London to decline from 14 percent to 12 percent.The interest rate in New York is 10 percent and not expected to change.The spot pound is $2.00 and interest rate parity operates perfectly.Explain how the bank would position itself to take advantage of the expected change in interest rates.

(e)The expected annual inflation rate is 5 percent in the U.S. and 2 percent in Germany.The U.S. dollar spot exchange rate (in euros) is0.82.Assume that purchasing power parity holds.What is the expected exchange rate in one year?

(f)With respect to foreign exchange, distinguish between forward contracts, currency futures, and currency options.