1. Suppose that the annual interest rate is 2.5 percent in Korea and 4.2 percent in Germany, and that the spot exchange rate is Won1933.2/ and the forward exchange rate, with one-year maturity, is W1915.5/. Assume that a trader can borrow up to 2,000,000 or Won3,866,400,000

a.) Does the interest rate parity hold? Show your work.

b.) Is there an arbitrage opportunity? (covered interest arbitrage)

c.) If there is an arbitrage opportunity, what steps should we take in order to make an arbitrage profit?

d.) What will be our maximum profit?