Clearly explain your arbitrage strategy

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Suppose you observe the following exchange rates: S($/€) = 1.25. The one-year forward rate is F1($/€) = 1.26. The risk-free interest rate in the U.S. is 5% and in Germany it is 2%. You can borrow either $1,000,000 or €800,000. Briefly and clearly explain your arbitrage strategy.

Reference no: EM131518790

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