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An Italian currency dealer has good credit and can borrow 800,000 for one year. The one-year interest rate in the U.S. is is = 2%
An Italian currency dealer has good credit and can borrow 800,000 for one year. The one-year interest rate in the U.S. is is = 2% and in the euro zone the one-year interest rate is ie = 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 euro-denominated profit via covered interest arbitrage. Problem 2: (3 marks) Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/ and the forward exchange rate, with one- year maturity, is $1.58/. Assume that an arbitrager can borrow up to $1,000,000 or 625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year
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