Suppose you observe the following exchange rates: S($/) = 1.25. The six-month forward rate is F6-m($/) = 1.26. The annual risk-free interest rate in the U.S. is 5% and in Germany it is 2%. You can borrow either $1,000,000 or 800,000.

Which of the following strategy you will make a profit?

borrow USD and lend in Germany

borrow Euro and lend in US

Briefly and clearly explain your arbitrage strategy.

Your total arbitrage profit will be $(please leave whole dollars for your answer).