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As a trader for the AMBS Hedge fund, you see the following prices from two different banks which are valid today: 1-year euro deposit/loan interest

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As a trader for the AMBS Hedge fund, you see the following prices from two different banks which are valid today: 1-year euro deposit/loan interest rate: 2.0% - 2.125% per annum 1-year dollar deposit/loan interest rate: 3.5% - 3.625% per annum Spot exchange rates (bid-ask): JPY 121.12 / EUR -JPY 121.43 / EUR JPY 104.30 / USD -JPY 104.40 / USD . 1-year forward exchange rates (bid-ask): USD 1.2500 / EUR - USD 1.2650 / EUR The interest rates are quoted on a 360-day year. a) Calculate the spot exchange rates (bid-ask) of USD per EUR? (15 marks) b) Explain clearly why covered interest arbitrage can be undertaken and how the no-arbitrage equilibrium can be recovered. (15 marks)

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