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Undertaking arbitrage activity

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Suppose the following situation prevails in the foreign exchange and Eurocurrency market for the euro and British pound. one- year Eurocurrency rates -  Euro = 3.125%  British pound 4.250%.  Exchange rate- spot = 1.5245 Euro/pound.  One- year forward 1.4575 Euro/pound.

Explain how an individual would profit from financial arbitrage in this situation. Calculate the % return the individual would earn from undertaking arbitrage activity.

Reference no: EM131081225

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