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Quotes for the dollar and euro are as follows:               Spot contract midpoint                 &nbs

Quotes for the dollar and euro are as follows:

              Spot contract midpoint                           S0EUR/USD   = €0.8890/$

              One-year forward contract midpoint      F1EUR/USD   = €0.8960/$

              One-year Eurodollar interest rate           iUSD   = 3% per year

        a.   Your newspaper does not quote one-year Eurocurrency interest rates on EU euros. Make your own estimate of iEUR.

        b.   Suppose that you can trade at the prices for SEUR/USD, FEUR/USD and iUSD just given and that you can also either borrow or lend at a Thai Eurocurrency interest rate of iEUR = 4 percent per year. Based on a $1 million initial amount, how much profit can you generate through covered interest arbitrage?

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