Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate...

Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are 12.7 % and 0.8 %, respectively. The current spot rate RON/US$ is 4.00 and 6-months forward rate RON/US$ is 4.21.


Can arbitrage profits be made? If yes, assuming that Romania is your home country, would you borrow 4,000,000 RON in Romania or 1,000,000 US$ in the United States? Calculate your arbitrage profit.