1. Suppose that the spot price of a euro is $1.00, the one-year forward rate on euros is $1.05, and the interest rate on 1-year euro-area deposits is 10 percent. What would the interest rate have to be in the United States to make you indifferent between putting your money there or here?
2. Suppose £1= $2.4110 in New York, $1= €1.050 in Paris, and £1= €2.50 in London.
a.) If you begin by holding £1, then how could you profit from these exchange rates?
b.) Ignoring transaction costs, what is your arbitrage profit per pound initially traded?