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4. Suppose that you can borrow or lend for one year at 4% in the U.S....

4. Suppose that you can borrow or lend for one year at 4% in the U.S. in $US and you can borrow or lend in Germany in euros at 2%. Assume there is no risk of default. You see in the newspaper that the spot exchange rate is $1 = .9 euros and the one-year forward exchange rate is $1 = .85 euros. Are there riskless profits to be made? What transactions would you undertake to make such profits? If everyone made such transactions what would happened to interest rates and the spot and forward exchange rates? Give one possible set of values for the interest rates and exchange rates for which there would be no riskless profits.

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