.) A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U. S. is i$ = 5% and in the euro zone the one-year interest rate is i€ = 4%. The spot exchange rate is $1.25/€ and the one-year forward exchange rate is $1.40/€. a.) Show how to realize a certain profit via covered interest arbitrage. A) Borrow $1,000,000 at 2%. Trade $1,000,000 for €800,000; invest at i_€=6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600

B) Borrow €800,000 at i_€=6%. translate to dollars at the spot, invest in the U. S at i_$=2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00 Net profit $2400

C) Borrow €800,000 at i_€=6%. translate to dollars at the spot, invest in the U. S at i_$=2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00 Net profit $2000

D) Both C and B.

The question does not fit the options, since the options all refer to a 2% interest rate in US dollars and a 6% interest rate in euros. While the question states that the interest rate in US dollars is 5% and the interest rate in euros is 4%.

The answer to the question is:

If you borrow $1,000,000 today, you will be able to purchase 800,000€. Or if you borrow 800,000€ today, you will be able to purchase $1,000,000.

Since the forward rate is higher, you should borrow dollars, invest in euros and after a year, purchase back dollars and pay back your debt.

Gain:

= 800,000€ x 1.04 = 832,000€ x 1.4 = $1,164,800, then you pay back your loan = $1,164,800 - ($1,000,000 x 1.05) = $1,164,800 - $1,050,000 = $114,800 gain

Options C will also yield gains:

option C = borrow 800,000€ and buy $1,000,000. After one year you will have $1,020,000 which you can use to purchase 850,000€. Your gain = 850,000€ - (800,000€ x 1.06) = 2,000€

if it is for a job, then you should learn everything you can about the job, like what does it involve, what qualification is required and how you are the right person for that job. dress appropriately for the interview. get plenty of rest the night before. good luck!