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The euro exchange rate is $1.25/euro. The continuously compounded dollar interest rate is 5% and the continuously compounded euro interest rate is 4%. Suppose that

The euro exchange rate is $1.25/euro. The continuously compounded dollar interest rate is 5% and the continuously compounded euro interest rate is 4%. Suppose that you borrow euros and lend dollars for 1 year, without using futures to hedge.

(a) At what exchange rate in 1 year will you break even on this position?

(b) If the exchange rate in 1 year is $1.30, what is your profit?

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