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Determine the realize profit in terms of euros

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Reference no: EM133071985

Suppose that the current spot exchange rate is EUR/USD 0.80 and the three-month forward exchange rate is EUR/USD 0.7813. The three-month interest rate is 8% per annum in the United States and 5.4% per annum in France. Assume that you can borrow up to USD 1,000,000 or EUR 800,000.

(a) Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of USD. Also determine the size of your arbitrage profit.

(b) Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine he arbitrage profit in euros.

Reference no: EM133071985

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