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You are an American investor who can borrow $1,000,000 or the equivalent amount in euros today. Suppose the spot rate is $1.05/, and the one-year

You are an American investor who can borrow $1,000,000 or the equivalent amount in euros today.

Suppose the spot rate is $1.05/, and the one-year forward rate is $1.12/. The annual interest rate is 5 percent in the U.S. and 3 percent in Germany.

Check if IRP holds. If it does not hold, set up a covered interest arbitrage. What will be your profit from this arbitrage opportunity in dollars?

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