Suppose that the six-month interest rate in the United Kingdom is 0.5% per annum the six-month interest rate in Germany

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answerhappygod
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Suppose that the six-month interest rate in the United Kingdom is 0.5% per annum the six-month interest rate in Germany

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Suppose that the six-month interest rate in the United Kingdom
is 0.5% per annum the six-month interest rate in Germany is 1.2%
per annum. If the spot exchange rate is GBP/EUR 1.1286 and the
six-month forward exchange rate is GBP/EUR 1.1312. Assume that the
arbitrager can borrow up to EUR 1,000,000 or the equivalent GBP
amount, at the spot rate.
Explain the adjustments to the interest rates and the spot and
forward rates to restore equilibrium.
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