Suppose that the current spot price for the euro is $0.90, and that the interest rate in the euro zone stands at 15%. Further assume that the term structure in the US is flat at 5%, and that the volatility of the dollar/euro exchange rate stands at 35%. Stock XX . is a new firm in the forward trading business. They are buying and selling one-year forward contracts on the euro. They are quoting a bid of $0.86 and an ask of $0.87.

(a) What would you assess as a fair value for the one-year forward price on the euro?

(b) If you could trade with Stock XX can you suggest a trading strategy?