Will an Arbitrageur Facing the Following Prices Be Able to Make

Will an arbitrageur facing the following prices be able to make money?

A) Yes, borrow $1,000 at 5%; Trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5%; Hedge this with a forward contract on €1,044.55 at $0.99 = €1.00; Receive $1.034.11.
B) Yes, borrow €1,000 at 6%; Trade for $ at the bid spot rate $1.00 = €1.00; Invest $1,000 at 4.5%; Hedge this with a forward contract on €1,045 at $1.00 = €1.00.
C) No; the transactions costs are too high.
D) None of the above

Correct Answer:

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