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Suppose that the 1-year interest rates in Germany and the United States are 2% and...

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Finance

Suppose that the 1-year interest rates in Germany and the United States are 2% and 3.5% (continuously compounded). The spot exchange rate between the euro (EUR) and the US dollar (USD) is 1.18 USD per EUR. Suppose that the 1-year forward exchange rate is 1.21. How can an arbitrageur generate arbitrage profits? Explain in detail.

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