The One-Year CD Rates for Financial Institutions with AA Ratings

The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S. and 8 percent in France. An AA-rated U.S. financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market. The current spot rate is $0.20/Euro.
-If the bank receives a quote of $0.1975/€ for one-year forward rates for the Euro (to buy and to sell) , what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount?

A) $5,000.
B) $16,500.
C) $19,350.
D) $22,000.
E) $25,675.

Correct Answer:

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