Natasha Nguyen is a foreign exchange dealer for a US bank. She wishes to consider whether Purchasing Power Parity holds between the US$ and the Japanese yen. She also wonders whether she should invest in US$ or in Japanese yen to make a covered interest arbitrage (CIA) profit. She can borrow US$1,000,000 or dollar-equivalent to invest for the next 12 months. Consider US as home market and Japan as foreign market. She faces the following interest rates, exchange rates and inflation rates: - 3-month nominal interest rates in Japan and the US are 7% and 9%, respectively. ~ Spot and 3-month forward rates, respectively, are *142/US$1 and V139/US$1.~ Inflation rates in Japan and the US are 4% and 5.5%, respectively.~ Does interest parity hold? If not, where do you recommend that Natasha Nguyen borrow and invest and why?~ ii. Assuming no transaction costs, what would Natasha's covered interest arbitrage profit (or loss) be on the borrowed amount of US$1 million or dollar-equivalent yen (use 2 decimal points)? ~