1. Your firm wants to hedge its currency risk on a new contract that it has made with a German firm. According to this contract, your firm will be paid 100 million exactly 2 years from today. It wants to hedge this risk by entering into a currency forward contract.

The current exchange rate is $1.17/. Interest rates on 2-year Treasuries are currently 0.22%, compounded continuously. Interest rates in the Eurozone are currently 0.39%, compounded continuously.

1. What should be the forward rate on this forward contract?

2. Your broker is offering a forward contract at $1.20/. Is there an arbitrage opportunity? If so, describe how to take advantage of it and show the resulting profits. If not, explain why this does not present an arbitrage opportunity. Assume no credit risk.