Suppose you have the following information:

Current spot rate: S = $1.30/

Interest rate on dollars: i^$ = 5%

Interest rate on euros: i = 2%

• Please calculate 1-year forward exchange rate, based on the Interest Rate Parity.
• If the actual 1-year forward rate is quoted at $1.34/, is there any covered interest arbitrage opportunity? Please explain.
• If yes, how can you make an arbitrage profit? Assume you can borrow up to $1,300,000 or 1,000,000. Please show all transactions necessary to make the profit.