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Suppose interest rates are 7.5% per annum in the US and 4% per annum in France,...

Suppose interest rates are 7.5% per annum in the US and 4% per annum in France, and that the spot exchange rate is $1.3500/€. The one-year forward price is $1.3700/€.

a. Do these prices and rates suggest an arbitrage opportunity? (show why or why not – provide a numerical justification for your answer and explain what that numerical justification means)?

b. If there is an arbitrage opportunity, include all of the necessary transactions and cash flows to exploit the opportunity (assume you start your strategy by borrowing 100 units of a currency)

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