Presume interest rates in the U.S. and Germany (measured by the yields on short term government bills) and exchange rates between the dollar and the Euro (Germany is in the Euro zone) are as follows: One- year U.S. interest rate is 0.13282% One- year German interest rate is 1.13593% The spot rate between euro (€) and dollar ($) is: €1 = $1.3515 One-year forward rate on euro is: €1 = $1.35 Please answer the following questions. (note: to get full credits, please show all your work to demonstrate how you get the answers).
a. Please state whether the forward rate on euro is at premium or at discount and then calculates the annualized percentage premium (or discount) for the euro;
b. Please state if there is arbitrage opportunity in the markets. If so, please demonstrate the steps to profit and show the rate of return.