Suppose that the current spot exchange rate of the EUR is USD 1.15 / EUR and...

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Suppose that the current spot exchange rate of the EUR is USD1.15 / EUR and the 3-month forward exchange rate is USD $1.10 /EUR. The 3-month interest rate is 6% per annum in the US and 4% perannum in Germany. Assume that you can borrow EUR 1,000,000 or USD1,150,000. 1. Determine whether interest rate parity is currentlyholding. 2. If IRP is no holding, how would you carry out coveredinterest arbitrage (CIA)? Show all the steps and determine thearbitrage profit. Assume you choose to keep your profits in USdollars. 3. Do the problem again, assuming that you choose to keepyour profits in euros.

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Suppose that the current spot exchange rate of the EUR is USD1.15 / EUR and the 3-month forward exchange rate is USD $1.10 /EUR. The 3-month interest rate is 6% per annum in the US and 4% perannum in Germany. Assume that you can borrow EUR 1,000,000 or USD1,150,000. 1. Determine whether interest rate parity is currentlyholding. 2. If IRP is no holding, how would you carry out coveredinterest arbitrage (CIA)? Show all the steps and determine thearbitrage profit. Assume you choose to keep your profits in USdollars. 3. Do the problem again, assuming that you choose to keepyour profits in euros.