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Suppose you have the following information:

Current spot rate: S = $1.30/€

Interest rate on dollars: i^$ = 5%

Interest rate on euros: i^€ = 2%

Please calculate 1-year forward exchange rate, based on the Interest Rate Parity.
If the actual 1-year forward rate is quoted at $1.34/€, is there any covered interest arbitrage opportunity? Please explain.
If yes, how can you make an arbitrage profit? Assume you can borrow up to $1,300,000 or €1,000,000. Please show all transactions necessary to make the profit.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91527177

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