1. Suppose you observe the following exchange rates: €1 = $1.45; £1 = $1.90 and interest rates: €2.37% and £2.96%, calculate the euro-pound exchange rate:
2. Suppose that the annual interest rate is 2.47 percent in the United States and 4.25 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to $2,750,000 or €1,718,750. If an astute trader finds an arbitrage, what is the net profit in one year?
3. How does a company establish its minimum rate of return on investments?