7. Akira Numata CIA Japan. Akira Numata, a for- eign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes:

The bank does not calculate transaction costs on any individual transaction because these costs are part of the overall operating budget of the arbitrage department. Explain and diagram the specific steps Akira must take to make a covered interest arbi- trage profit.

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Spot exchange rate: 180-day forward 118.60/$ exchange rate: 117.80/$ 180-day dollar interest rate: 4.800 % per year 180-day yen interest rate: 3.400% per year