The table below shows the information for exchange rates and interest rates in the US and Italy. Answer the following questions
Current spot rate: $1.39/€
One-year forward rate: $1.37/€
Interest rate in the US: 4%
Interest rate in Italy: 3.4%
(a) Find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1000 traded for € at the spot and invested in Italy.
(b) There is one profitable arbitrage at these prices. How can you conduct the covered interest arbitrage if you can either borrow $1000 in the US or €1000 in Italy? What would be the profit?