A Germany-based currency dealer has good credit and today can borrow $1,000,000 or its equivalence for one year. The one year interest rate in the U.S. is i$ = 2% p.a. and in the euro zone the one year interest rate is i = 6% p.a.. The spot exchange rate is $1.25 = 1.00 and the one-year forward exchange rate is $1.20 = 1.00. Show how to realize a certain euro profit via covered interest arbitrage.

(I) Borrow $1,000,000 at 2%. Trade $1,000,000 for 800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600.

(II) Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate back to 848,000 at the forward rate of $1.20 = 1.00. Net profit $2,400.

(III) Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate back to 850,000 at the forward rate of $1.20 = 1.00. Net profit 2,000.

Group of answer choices

None of the other answers

Only (III)

Only (I)

Both (II) and (III)

Only (II)