Covered Interest Arbitrage - The oneyear interest rate in Canada is 6 percent. The oneyear U.S. interest rate is 10 percent. The spot rate of the Canadian dollar is $.50. The forward rate of the Canadian dollar is $.54.

a) Is covered interest arbitrage feasible for U.S. investors that have an initial investment of $1,000,000?

b) Is covered interest arbitrage feasible for Canadian investors that have an initial investment of C$1,000,000?

In each case, explain why covered interest arbitrage is or is not feasible.

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