q53

Suppose that the annual interest rate is 2% in the US and 4% in Germany and that the spot exchange rate is \$1.15/e and the 1 year forward exchange rate is 1.12/Assume that an arbitrageur based in the US can borrow up to \$1,000,000 or 850,000, how much guaranteed US-dollar profit can the arbitrageur

About 9.000.

About $7.000

About 13,000

About 11,000

b. Suppose that the annual interest rate is 2% in the US and 4% in Germany, and that the spot exchange rate is \$1.15/e and the year forward exchange rate is \$1.12/E . The no- arbitrage forward rate should be \$1.1725/e and the euro is overpriced in the forward market.

The no- arbitrage forward rate should be $1.1725/ and the euro is underpriced in the forward market. The no- arbitrage forward rate should be \$1.1279/e and the euro is underpriced in the forward market. The no-arbitrage forward rate should be $1.1279 and the euro is overpriced in the forward market.