1. A bank is quoting suppose the market condition is summarised as follows:

3 Months interest rates in US = 8%p.a

3 Months interest rate in Germany =5%p.a

Current spot rate Euros 0.80/$

3 months forward exchange rate Euros 0.7994/$

Required

Execute a CIA scheme, assuming an arbitrageur can borrow $ 1 Million or the equivalent of Euros 800,000

2. You are considering a project in India which has an initial cost of 1,050,000RS. The project is expected to return a one-time payment of 1,970,000RS five years from now. The risk-free rate of return is 2 percent in the U.S. and 4.5 percent in India. The inflation rate is 1.7 percent in the U.S. and 4 percent in India. Currently, you can buy 5,200RS for $100. How much will the payment five years from now be worth in U.S. dollars?

$27,380

$29,006

$31,579

$33,484

$35,412