An individual has the possibility of borrowing $85,000 or 50,000. Transactions costs are zero.

one-year interest rate on $: 5.80% (annual)

one-year interest rate on : 4.60% (annual)

spot exchange rate: 1.70 $ per

six-month forward exchange rate: 1.85 $ per

(a)Using the information given above, calculate the covered interest arbitrage profit that the investor couldearn over a six-month period. Show and explain each step in the processof the investor.

(b)Suppose that many other investors can undertake the same borrowing and investment activities. Explain intheoryhow each of the key variablesabove will adjust.

(c)Alternatively, [(to (b)] suppose the interest rate parity theory of forward exchange rates is correct(i.e. the forward exchange rate is determined solely by interest rates and the spot rate). Explain in words, as well as by providing a quantitative answer, what will happen in the market.