Suppose that the euro exchange rate is $1.15/euro. The continuously compounded dollar interest rate is at 3% and the continuously compounded euro interest rate is at 2%. Suppose that you borrow euros and lend dollars for 1 year, without using futures for hedging, and your initial cash flow is zero.

(a) At what exchange rate in 1 year will you break even on this position?

(b) If the exchange rate in 1 year is $1.20, what is your profit (per 1000 euros borrowed at time 0)?

(c) If the exchange rate in 1 year is $1.12, what is your profit (per 1000 euros borrowed at time 0)?

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