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Is covered interest arbitrage possible

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Reference no: EM132885244

Question 1: Assume the current spot exchange rate is 1.25 $/€. The one year forward rate is 1.20 $/€. Dollar based interest rate is 6% and Euro based interest rate is 7.5%. Is covered interest arbitrage possible? If so, describe how to exploit it and show how much arbitrage profit can be earned on $1,000,000 or its equivalent in Euro.

Reference no: EM132885244

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