Question 3x. You are a currency trader with $1,000,000 (or the euro-equivalent amount) of available funds to borrow for one year.

Question 3x.

You are a currency trader with $1,000,000 (or the euro-equivalent amount) of available

funds to borrow for one year. You arrive at work this morning and see the following data

from Thomson Reuters on your computer screen:

Spot exchange rate

One-year forward rate

$1.00 per €

$1.01 per €

Dollar one-year interest rate

2.10%

Euro one-year interest rate

1.05%

Note: Refer to the image below in order to answer several of these questions.

a.

What is the forward premium on the euro? (The value of the euro in the forward market vs. the

spot market express in dollars as a percentage). Express your answer as a percentage to two

decimal places and exclude the “%” sign.

___________

b.

Given the spot rate and forward rate on the euro, what should be the difference in interest rates

(the interest rate in the dollar less the interest rate in the euro) based on covered interest rate parity (use

what is described as the approximate form in the slide deck)? Express your answer as a percentage to two

decimal places and exclude the “%” sign.

___________

c.

Does a covered interest arbitrage opportunity exist? Type in “Yes” or “No”

___________

d.

Which of the strategies below would you implement to exploit the arbitrage opportunity and

recognize your profits in euros in one year? Provide your answer as “Strategy” followed by Roman

numerals.

___________

e.

What would be your arbitrage profits? Do not round intermediate results and express your answer

(in euros) to two decimal places.

___________