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Suppose that the current spot exchange rate is 0 . 8 0 / $ and the three - month forward exchange rate is 0 .
Suppose that the current spot exchange rate is $ and the threemonth forward exchange rate is $ The threemonth interest rate is percent per annum in the United States and percent per annum in France. Assume that you can borrow up to $ or
a Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of US dollars. Also determine the size of your arbitrage profit.
b Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros.
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