Business, 30.11.2019 03:31 samiyahwhite4792

An italian currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. the one-year interest rate in the u. s. is i$ = 2% and in the euro zone the oneyear interest rate is i€ = 6%. the spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. show how to realize a certain euro-denominated 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. net profit $2,400.

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 proceeds back at the forward rate of $1.20 = €1.00. net profit $2,400.

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 proceeds back at the forward rate of $1.20 = €1.00. net profit €2,000.

d. both c) and b)

the answer is c i need to clear explain

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An italian currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year...

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