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ABC Corp is a multinational corporation that generates revenue in multiple currencies. The company is considering investing in a project in a foreign country and

ABC Corp is a multinational corporation that generates revenue in multiple currencies. The company is considering investing in a project in a foreign country and wants to evaluate the potential impact of exchange rate changes on its expected returns. To do so, the company is exploring the use of covered interest arbitrage to generate additional returns from the currency market.

ABC Corp has access to the following information: The current spot exchange rate for USD/EUR is 0.85. The three-month forward exchange rate for USD/EUR is 0.86. The current three-month USD LIBOR rate is 1.5% per annum. The current three-month EUR LIBOR rate is 1.0% per annum. 1) Assuming ABC Corp borrows USD 1,000,000 for three months and invests the proceeds in EUR using a three-month forward contract, calculate the potential profit or loss from covered interest arbitrage, assuming no transaction costs.

2) What are some potential risks and limitations of using covered interest arbitrage as an investment strategy, and how can ABC Corp mitigate these risks?

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