(a) With the initial fund of Mexico pesos (MXP 1,000,000) to invest in foreign exchange market, Steve wonder if he should invest in Mexico pesos or make a covered interest arbitrage investment in U.S dollar. Following are the information:

Current rate of Mexico peso = $0.100

180-day forward rate of Mexico peso = $0.098 180-day Mexican interest rate = 6 percent 180-day U.S interest rate = 5 percent

Given this information, is covered interest arbitrage worthwhile for Steve to invest?

Explain your answer with diagram.

(b) As a foreign exchange trader, you are responsible to source for short term financing which is needed in 6 month time. The required financing amount is US$10 000.Your banker informed that the interest rate in United States is 8% per annum while in Japan is 3% per annum. The current spot rate is /US$ 106.00 and the 6 month forward rate is /US$ 104.50.How could you take advantage of the interest rate differential and the availability of the forward market to secure your funds? Determine its profit or loss in Japanese Yen.