Determining the arbitrage opportunity

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Suppose that interest rate is 10 percent per annum in the USA and 7.0 percent per annum in Italy, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.57/€. Assume that an arbitrager can borrow up to $100,000 or €62,500.

a) Determine if there is any arbitrage opportunity and the arbitrage profit that can be made if there is. (Show steps of your transactions)

b) What would the Italy interest rate have to be so that there would be no arbitrage opportunity? (Show steps of your transactions)

Reference no: EM133076537

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