c. An Italian currency dealer has good credit and can borrow 1,000,000 or $1,250,000 for one year. The one-year interest rate in the U.S. is i_$ = 3% and in the euro zone the one-year interest rate is i = 7%. The spot exchange rate is $1.25 = 1.00 and the one-year forward exchange rate is $1.22 = 1.00.

i. Show and explain (Prove) whether or not according to the information provided above there exist an arbitrage opportunity.

ii. If your answer to the above question is that there exist an arbitrage opportunity, Show and explain how to realize a riskless profit via covered interest arbitrage. To get full credit please show your work and make sure you indicate the currencies for each step. If your answer to the above question is that IRP is holding so there is no arbitrage opportunity, then just put NA to indicate that this question isnt applicable.