A dutch investor have 1000 euros to place in a bank deposit in either country X and Y. The one-year interest rate on bank deposits is 1% in X and 5% in Y. The
one-year forward X-Y exchange rate is 1.65 x per y and the sport rate is 1.5 x per y.
(a) What is the country X-denominated return on Dutch deposits for this investor?
(b) What is the (risk less) X-denominated return on Y deposits for this investor using forward
(c) Is there an arbitrage opportunity here? Explain why or why not. Is this an equilibrium in the
forward exchange rate market?