Jason is a currency trader in Sydney and has 1 million Australian dollar (or the U.S. dollar equivalent) available. She considers 180 day arbitrage opportunities and retrieves the following current foreign exchange rates and interest rates: (Note that Australian dollar is regarded as the home currency.

Spot exchange rate in Sydney:	$A1.1764/$US
6-month forward rate in Sydney:	$A1.2575/$US
U.S. dollar interest rate:	5.0 percent per annum
Australian dollar interest rate:	7.0 percent per annum

1) What is covered interest arbitrage (CIA)?

2) In the absence of transaction costs, is covered interest arbitrage (CIA) possible in the above case? If yes, calculate how much profit Jason could make (annualized rate of return over her initial investment). Hint: explain and diagram the specific steps Jason must take to make a CIA profit.