Suppose that the current spot exchange rate is AUD2.7450/ - AUD2.7550/ and one-year forward rate is AUD2.6450/ - AUD2.6550/. The one-year interest rate is 7.75% - 8.25% in Australia and 3.75% - 4.25% in UK. Assume that you can borrow AUD10,000 or 10,000.

a) Show how to realize Covered interest arbitrage (CIA), assuming you want to realize in term of AUD and determine the arbitrage profit/losses.

b) Assume that you want to realize in term of GBP (). Show the CIA process and determine the arbitrage profit/losses in .