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QUESTION 5: Suppose that the annual interest rate is 8% in England and 12% in, Germany, and that the current spot exchange rate is 1.200/1.

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QUESTION 5: Suppose that the annual interest rate is 8% in England and 12% in, Germany, and that the current spot exchange rate is 1.200/1. If we assume that the arbitrager can borrow up to 2,000,000 in England, or its equivalent in Germany based on the current spot exchange rate, you are required to: a). Calculate the covered interest arbitrage on the transaction (7 marks) b). Determine the equivalent of the covered interest arbitrage in Euro terms (6 marks)

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