The spot exchange rate today is 1.32 US Dollars for every Euro. Suppose the 6-month continuously compounded interest rates are 2% in the US and 3% in Europe.

(a) What should the price of a currency futures contract deliverable in 6 months be?

(b) Suppose that the futures price quoted in the market is 1.30. What would you do to profit from the situation? Is it an arbitrage?

Hint: Long a futures contract (for the quoted futures price), lend out some amount of US Dollars and borrow the equivalent amount in Euros. Choose this amount in such a way that you have 100 Euros at the futures contract delivery. What is the difference in US Dollar terms of the proceeds of the two loans and the futures contract?