Dani is a currency strategist with the New York-based hedge fund Karma. With the annual interest rate at 8.5% for real-denominated deposits with AAA-rated Brazilian banks, Dani is considering taking $10 million from Karma money market funds currently yielding annual interest rate of only 0.75% to invest in real (BRL). The current spot exchange rate between the U.S. and Brazilian currency currently stands at BRL 1.82 = $1.

a. Under what exchange rate scenario would this transaction be profitable?

b. What are the risks involved in this transaction?

c. To discourage speculative short-term capital inflows, the central bank of Brazil is imposing a 10% withholding tax on interest earnings by foreign investors. Will Danis decision be changed? Why or why not? Show your calculation"