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Suppose you observe a spot exchange rate of $1.50/. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone.

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Suppose you observe a spot exchange rate of $1.50/. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone. (10 points) a. What is the no-arbitrage 1-year forward rate? (3 points) b. If the 1-year forward rate is quoted as $1.50/, should you borrow $15000 or 10000, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. (7 points)

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