You have the following information:

Spot rate EUR/US$ 1.20

One year Forward premium on Euro 1.67%

Expectations for Euro/US$ rate after 1 year 1.22

Interest rate on US$ 1%

Interest rate on Euro 3%

You want to do a currency arbitrage (if it is possible) and for this you can borrow either Euro 1m or US$1m.

a- Showing all steps, is arbitrage possible? What is the maximum profit / loss that you can make after 1 year if you attempt to do an arbitrage?

b- Without doing any calculations and looking at the data above, can you decide whether arbitrage is possible or not? Explain briefly.