The current spot exchange rate is S0$/ = $1.5/, and the one-year forward rate is F1$/ = $1.55/. The interest rate in the United States in USD is 7 percent.

a) What is the interest rate in euros (i) if the international parity conditions hold?

b) If this annual forward premium persists into the future, what should be the euro's value in five years?

c) Suppose interest rates in euros are currently 3 percent (i = 0.03). How much profit can you generate through covered interest arbitrage? Remember that arbitrage means that you make a profit with zero investment and zero risk. Zero investment means that you need to borrow money in order to initiate the arbitrage. Suppose you initiate the arbitrage strategy borrowing 1 million monetary units of the appropriate currency.