Suppose the following situation prevails in the foreign exchange and Eurocurrency market for the euro and British pound. one- year Eurocurrency rates - Euro = 3.125% British pound 4.250%. Exchange rate- spot = 1.5245 Euro/pound. One- year forward 1.4575 Euro/pound.
Explain how an individual would profit from financial arbitrage in this situation. Calculate the % return the individual would earn from undertaking arbitrage activity.