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1. Assume that the dollar—Euro exchange rate {Ens} = 1.1Ir the
U.S. interest rate is 4% and the Euro interest rate is 2%, and
that covered interest parity holds. a. How many Euros will an American investor with $1,GDD have a
year from now? b. What is the forward exchange rate (FWE} ? 2. Assume that you are able to borrow $1,DDD,DGD from a local
bank. Explain how you could make profits from arbitrage in the
following situations. Explain clearly what you would buy and what
you would sell. Explain also the amount of profits that you
would make, assuming that there are no brokerage or transactions
costs. a. The current dollar-Euro exchange rate IE5”) is equal to 1.1 in
Frankfurt and 1.05 in New York. b. The dollar-Euro exchange rate {Ems} = 1.1, the dollar-pound
exchange rate {Ew£}= 1.5, and the pound-Euro rate (Eye)= .8.
3. In which country would you save if the nominal interest rate equals 4% in the U.S. and 1% in Germany, the current dollar-Euro
exchange rate (Eva is equal to 1.2 and your expected exchange
rate one year from now {BAH} equals 1.25.

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