1. A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year inflation rate in the U.S. is π$ = 2.5% and in the euro zone the one-year inflation rate is π€ = 5.5%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities? $1.1547 = €1.00 $1.2351 = €1.00 $1.2471 = €1.00 $1.0200 = €1.00
2. Suppose the futures price is below the price predicted by CIP. What steps would be necessary to follow in order to assure an arbitrage profit?
Go long in the spot market, go short in the futures contract.
Go long in the spot market, go long in the futures contract.
Go short in the spot market, go long in the futures contract.
Go short in the spot market, go short in the futures contract.