I. $(40$ points$)$

Mr$.$ A$,$ a foreign exchange trader in Tokyo, is exploring covered interest arbitrage

possibilities. He wants to invest $$6,000,000$ or its yen equivalent for $180$ days, in a covered

interest arbitrage between U$.$S$.$ dollars and Japanese yen. He faced the following exchange

rate and interest rate quotes:

a$.$ Is there a CIA possibility? Why? Answer this question first. Then you can

proceed for $b.$

b$.$ Explain and diagram the specific steps he must take to make a covered

interest arbitrage profit. Show which currency is for borrowing and which

currency is for investment.

c$.$ He is also exploring uncovered interest arbitrage. He forecasts the spot

after $180$ days will be $\frac{114\mathrm{.}00}{\text{\$}}.$ Suppose the actual spot after $180$ days is as

forecasted, how much profit is to be made? Show which currency is for

borrowing and which currency is for investment.