Suppose that the current spot exchange rate is $1.2/ and the 1-year forward exchange rate is $1.3/. The U.S. 1-year interest rate is 5 percent and the U.K. 1-year interest rate is 6 percent. Assume that you can borrow up to $1.2M or 1M.

a. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit in U.S. dollars. Please show your step by step arbitrage strategy and calculation.

b. Assume that you want to realize profit in terms of British pounds. Show the size of covered arbitrage profit in British pounds. Please show your calculation.