A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year. The one-year interest rate in the U.S. isi$= 2% and in the euro zone the one-year interest rate isi= 6%. 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 dollar profit via covered interest arbitrage

Group of answer choices

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

b) Answers c) and b) are both correct

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

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