Prob. 4) I have a spot exchange rate is 0.80 euro/1$ and the three-month forward

Question

Prob. 4)

I have a spot exchange rate is 0.80 euro/1$ and the three-month forward rate is .7813euro/ 1$. The three-month interest rate is 5.6% per annum in US and 5.40% per annum in france. Asuume that you can borrow up to $1,000,000 or 800,000 euro.

a) show how to realize a certain profit via convered interest arbitrage, assuming that you want to realize profit in terms of USD. Also determine the size of your arbitrage profit.

I am using 6th ed soloutions manual and I can't figuer out how they got their arbitrage intrest rate of 1.0378

1.0378 = (F/S)(1+ i euro)

When I plug in the numbers it does not come to the same ansers. Please help

Explanation / Answer

. Suppose that the current spot exchange rate is

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