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In early 2019, the spot exchange rate between the US dollar and the Euro was 1.855700 $/Euro. The 6-month interest rate in the US is

In early 2019, the spot exchange rate between the US dollar and the Euro was 1.855700 $/Euro. The 6-month interest rate in the US is 3.5700% and the Euro rate is 2.3400%. Based on the table below, what should the 6-month $/Euro forward rate be to prevent arbitrage opportunities? Show all calculation to 6 decimal places.

1) What should the 6-month $/Euro forward rate be to prevent arbitrage opportunities?

2) Suppose the the 6-month $/Euro forward rate is 1.871795. What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?

3) Suppose the the 6-month $/Euro forward rate is 1.865367. What arbitrage opportunities are there? Construct an arbitrage/payoff table to outline your strategy. What is the aggregate arbitrage profit that can be made (if any)?

Pricing Inputs

DC/FC

Spot price ($/Euro)

1.855700

Time to expiration (in years)

0.5

Domestic Currency ($) interest rate

3.5700%

Foreign Currency (Euro) Interest Rate

2.3400%

Forward Rate ($/Euro)

1.8671477

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