Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/ and the one-year forward exchange rate, is $1.16/. Assume that an arbitrageur can borrow up to $1,000,000.

Which of the two options below is the correct answer, and why?

(A) This is an example where interest rate parity holds.

(B) This is an example of an arbitrage opportunity; interest rate parity does NOT hold.