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Question
The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S. and 8 percent in France. An AA-rated U.S. financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market. The current spot rate is $0.20/Euro.
If the bank receives a quote of $0.1975/ for one-year forward rates for the Euro (to buy and to sell), what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount?
A. $5,000.
B. $16,500.
C. $19,350.
D. $22,000.
E. $25,675.
Answer
This answer is hidden. It contains 296 characters.
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