He can borrow up to 1,000,000 or the equivalent in dollars which is $1,200,000. In order to maximize his profit, he wants to borrow as much as he can. He has requested help from his friend Michael. They are working on it together. They want to answer the following questions: 1. What does arbitrage mean? Is it the same as profit or is it different? 2. David wants to check whether there is an arbitrage opportunity. How can he check for it? Is there an arbitrage opportunity here? 3. David wants to make money here. He is not sure which currency to borrow. He can borrow $1,200,000 or the equivalent in euros which is 1,000,000. How can he decide which currency to borrow? Is there a way to decide? 4. If David borrows the wrong currency, what will happen? 5. He has now decided what to do. He thinks he knows which currency to borrow. How can he make money here? What are the steps that he needs to follow? 6. When following these steps, is he undertaking any risk?

7. What will be his profit when he follows these steps? 8. If he borrows the other currency, what steps would he take? In that case, what would be his profit/loss?