1.Given the following information, find the profits you can make using covered interest arbitrage. Assume you can borrow either EUR 100,000 or

JPY 14,619,883.04

EUR interest rate = 3.5% per year

JPY interest rate = 0.4530% per year

S (EUR/JPY) = EUR 0.00684 per JPY

F (EUR/JPY) = EUR 0.0074 per JPY for 1 year maturity forward contract.

a.Which currency would you borrow to conduct covered-interest arbitrage?

b.Assume you want your profits in euro, what covered-interest arbitrage profits do you expect in 1 year? Show all the steps involved in the covered-interest arbitrage process.

c.What would be the profits if you realize them in JPY? Show your calculations.