Suppose the spot rate today is $1.10/ , the U.S. interest rate is 3% and the euro interest rate is 2%. You log onto your electronic brokerage account and find that the current quote for the 360-day forward rate of USD/EURO is $1.125/ .

a. Is the covered interest parity condition satisfied in this problem? Why or why not? Explain.

b. If arbitrage is possible, describe how much profit you could make from $1 investment. What do you expect to happen among your fellow traders? What will happen to exchange rates? (Whenever necessary, round your numbers to three decimal places.)