You notice that the interest rate in euros is 20% and the U.S. interest rate is 15%. The current exchange rate is 1.11 $ / . The forward rate (one year) is 1 $ / . Suppose you had $1,000.

What is i? ______%

What is (F R) / R + i*? ________% (Go ahead and round.)

How could you make money with covered interest arbitrage? Circle dollars or pounds, put numbers in blanks.

Borrow 1,000 (dollars or euros) at _______%

Turn the 1,000 (euros or dollars) into _________________ (dollars or euros).

Earn interest of ______% to have ________________ (dollars or euros) after a year.

Use the forward rate to turn proceeds into ___________________ (dollars or euros)

Pay back loan of ________________ (dollars or euros)

and earn a profit of _______________ (dollars or euros)