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(1)(a) What is covered interest arbitrage? How is it different from Triangular arbitrage and locational arbitrage? (b)Suppose that the 180-day interest rate is 5% in
(1)(a) What is covered interest arbitrage? How is it different from Triangular arbitrage and locational arbitrage? (b)Suppose that the 180-day interest rate is 5% in the U.S and 6\% in Mexico and that the spot exchange rate is $0.100 to the Mexican peso. Consider that the forward exchange rate, with 180 -day maturity is $0.098. If an arbitrager has the capacity to borrow either $1,000,000 or the peso equivalent at the current spot foreign exchange rate, (b1)Evaluate the feasibility of covered interest arbitrage for this investor. (b2)Determine the profit/loss that the investor could earn upon conclusion of the investment process. (b3)Briefly discuss the realignment process that would close the opportunities (if in fact they exist)for further arbitrage
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