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Assume the current spot exchange rate is 1.25 $/. The one year forward rate is 1.20 $/. Dollar based interest rate is 6% and Euro
Assume the current spot exchange rate is 1.25 $/. The one year forward rate is 1.20 $/. Dollar based interest rate is 6% and Euro based interest rate is 7.5%. Is covered interest arbitrage possible? If so, describe how to exploit it and show how much arbitrage profit can be earned on $1,000,000 or its equivalent in Euro.
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