1. a) A foreign exchange arbitrageur notices that the Japanese yen to U.S. dollar spot exchange rate is 108/$ and the three-month forward exchange rate is 107.30/$. The three-month $ interest rate is 1.20 percent per annum and the three-month interest rate is 5.20 percent per annum. a. Is the interest rate parity holding? Also, you need to indicate amount of mispricing, if any. b. Is there an arbitrage possibility?

b). If yes, what steps would be needed to make an arbitrage profit? Assuming that the arbitrageur is authorized to work with $1,000,000 for this purpose, how much would the arbitrage profit be in dollars?