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What will be the outcome of investing 100 in the eu market


Suppose you find the following rates:

Interest rates: U.S.: 3 percent and EU: 4 percent.

Exchange rates: Spot; $1.0650; One year forward: $1.0525.

(a) What will be the outcome of $100 invested in the U.S. market?

(b) What will be the outcome of investing $100 in the EU market with a forward Cover (sale)?

(c) Is there an arbitrage opportunity? If so, which way will the arbitrage capital move?

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