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Suppose you observe the following: S(EUR/USD) 0.9514 F(EUR/USD) 0.9478 i(US) 1.75% p.a i(EU) 2.00% p.a The observed forward rate is for a 9-month maturity Show

Suppose you observe the following:

S(EUR/USD) 0.9514
F(EUR/USD) 0.9478
i(US) 1.75% p.a
i(EU) 2.00% p.a

The observed forward rate is for a 9-month maturity Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit. Suppose you can borrow either 1 mil USD or 1 mil EUR. Show your workings. Keep 4 decimal places for exchange rate calculation.

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