1.

CIA

Assume the following interest rate and exchange rate quotes. You can borrow $1,000,000

or its yen equivalent 101,000,000:

Spot exchange rate:

101/$

1-year forward rate:

100/$

1-year $ interest rate:

1.50%

1-year interest rate:

0.70%

.

Use the rule of thumb to identify whether coved interest arbitrage is worthwhile. If yes,

what is your strategy and how much is your profit (show the steps)? What market forces

would occur to eliminate any further possibilities of covered interest arbitrage?