Suppose you observe the following exchange rates: Sl$fl = 1.25. The simeonth forward rate is F.m[$x') = 1.26. The annual riskifree interest rate in the US. is 5% and in Germany it is 2%. You can borrow either $1,000,000 or 800,000. Briey and clearly explain your arbitrage strategy. Show your work in each step to receive partial credits. HTMLEElltD B E E E E X! X: E E v a V El HT 1T4 12m v Paragraph v Borrow 800,000 at 2% rate in Germany. Convert to $ at 1.25 and invest at 5%. Using the forward rate, sell the dollars at 1.26 After 1ryear the value of investment in = 800,000 x 1.25 x 1.05 ,f 1.26 = 833,333 Loan repayment after year = 800,000 x 1.02 = 816,000 Arbitrage prot = 833,333 - 816,000 = 17,333