Current spot rate of euro = $1.10 1-year forward rate of euro = $1.12 1-year deposit rate in U.S. = 7% 1-year deposit rate in Europe = 4%

a.) You have $5,000,000 (US dollars) to invest. If you use covered interest arbitrage for a 1-year investment, what will be the amount of U.S. dollars you will have after one year?

b.) Continued from the above question, does the cover interest arbitrage work for you as a U.S. investor? (HINT: Calculate the rate of return you (as a U.S. investor) get when implementing the covered interest arbitrage. Compare the rate of return you obtain from implementing the covered interest arbitrage and the rate of return you (as a U.S. investor) earn by investing in the U.S. directly. )

c.) Assume you're a European investor with 5,000,000. If you use covered interest arbitrage for a 1-year investment, what will be the amount of euros you will have after one year?

d.) Continued from the above question, does the covered interest arbitrage work for you as a European investor? (HINT: Calculate the rate of return you (as a European investor) get when implementing the covered interest arbitrage. Compare the rate of return you obtain from implementing the covered interest arbitrage and the rate of return you (as a European investor) earn by investing in the Europe directly. )

e.) Does Interest Parity hold under the current market condition?

f.) What shall be the equilibrium one-year forward rate determined by the interest rate parity? (Rounded to the 4th decimal place.)