Parity Relationships and Arbitrage
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3. The following prices are observed. Formulate an arbitrage strategy to profit from the
situation.
? Dollar per Euro exchange rate is 1.25 spot and 1.20 for 180-day forward (one Euro buys
1.25 spot and $1.20 forward).
? German interest rate is 7.9% compounded daily.
? U.S. interest rate is 5.0% compounded daily.
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3. An arbitrage to take advantage of this involves the following steps:
a. Borrow ? ...
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