Interest rates on the U.S.dollar are 6.5% and euro rates are 5.5%.The dollar per euro spot rate is 0.950.What is the arbitrage profit on a required 1 million euro payment if the forward rate is 0.980 dollars per euro and the exchange occurs in one year?

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To calculate the arbitrage profit, we first need to determine the cost of two different strategies to make the required 1 million euro payment in one year.Strategy 1: Use the forward market- Buy 1 million euros forward at the rate of 0.980 dollars per euro. This will cost 0.980 * 1,000,000 = $980,000.Strategy 2: Use the money market (borrowing and lending)1. Borrow dollars today to convert into euros and invest in euro-denominated assets.2. The amount needed in euros in one year is 1 million. To find out how much to borrow today, we discount this amount by the euro interest rate: 1,000,000 / (1 + 0.055) = $947,867.30.3. Convert this amount into dollars at the spot rate: $947,867.30 * 0.950 = $900,473.94.4. Borrow this dollar amount and convert it into euros. After one year, repay the dollar loan with interest: $900,473.94 * (1 + 0.065) = $958,504.49.The arbitrage profit is the difference between the cost of these two strategies: $980,000 - $958,504.49 = $21,495.51, which is approximately $21,000.

Interest Rates on the U