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Please calculate 1-year forward exchange rate

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Reference no: EM13866490

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.

Reference no: EM13866490

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