A Currency Dealer Has Good Credit and Can Borrow Either

Multiple Choice

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?

A) $1.2471 = €1.00
B) $1.20 = €1.00
C) $1.1547 = €1.00
D) none of the above