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Suppose that the annual interest rate is 1.5% in the US and 3% in Germany, the spot exchange rate is $1.57/€ and the forward exchange rate with one-year maturity is $1.58/€. Assume that an arbitrator can borrow up to $1,000,000 with €625,000. If an astute arbitrator finds an arbitrage, what is the arbitrage profit in one year?

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Financial Management, Finance

Category:- Financial Management
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