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Profit from the pricing inconsistency

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One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Germany. The spot exchange rate for the US dollar is $1.50 to the EURO. The 12-month forward rate is $1.55.

i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above.

ii) Will the situation persist forever? Explain your answer.

Reference no: EM132555240

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