The present exchange rate between US dollars and Euros is 1.34 $/Euro. The price of a domestic 180-day Treasury bill is $99.50 per $100 face value. The price of the analogous Euro instrument is 98.50 Euros per 100 Euro face value.

a. What is the theoretical 180-day forward exchange rate?

b.Suppose the 180-day forward exchange rate available in the marketplace is 1.31 $/Euro. This is less than the theoretical forward exchange rate, so an arbitrage is possible. Describe a risk-free strategy for making money in this market. How much does it gain (in dollars), for a contract size of 100 Euro?