Your are given the following data:

Spot exchange rate is $1.2340/Euro

9-month forward exchange rate is 1.3289/Euro

9-month U$ interest rate = 1.5% p.a.

9-month euro LIBOR rate = 3.0% p.a.

Ignoring transaction costs, is the interest rate parity (IRP) holding?

Is there an arbitrage opportunity? If yes, what steps would you take to make an arbitrage profit (certain)? Assumign that you are authorized to work with $10,000,000 (or its euro equivalent) for this purpose, how much would your arbitrage profit be in $?

If you do not used a forward contract in this arbitrage opportunity, what transaction would you be engaged in? Briefly discuss the difference between these two.