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Assume you observe the following information: Bid Ask Spot ($/Euros): 1.4000 1.4300 360-day Forward ($/Euros): 1.4400 1.4900 U.S. Interest Rate: 4.10% 4.20% Please note that

Assume you observe the following information:

Bid Ask

Spot ($/Euros): 1.4000 1.4300

360-day Forward ($/Euros): 1.4400 1.4900

U.S. Interest Rate: 4.10% 4.20%

Please note that the bid U.S. interest rate is the deposit (or lending rate) a bank would pay a customer for depositing funds in the bank,

while the ask interest rate in the U.S. is the borrowing rate a customer can borrow at from a bank.

How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars, trading for euro at the spot, investing in the euro zone and hedging with a short position in the forward contract?

a.

4.123%

b.

3.176%

c.

3.665%

d.

3.478%

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