Suppose that the six-month interest rate in the United 5 tates is 2%, whille the six-month interest rate in Canada is 6%. Further, assume the spot rate of the Canadian doller is $0,80. Suppose that you have $500,000 with which to attempt covered interest arbitrage. Assume the forward rate is $0.76981, as you just calculated, and the interest rates are the same as have been used throughout this problem. To start, you exchange your $500,000 (ot the spot rate of $0.80 ) for 625,000 Canadian dollar. After depositing these funds for 6 months, and earning a retum of 6%, your deposit grows to 662 , 500Canadian dollar. When you convert your 662,500 Canadian dollar back to dollars, you end up with approximately , for a proft of about over your original $500,000. However, had you simply deposited your $500,000 in an atcount and accrued 2% interest, you would have for a profit of This example illustrates that covered interest arbitrage offer a significantly larger return than simply depositing the funds in a domestic account under interest rate parity. Suppose that Cloudastries Bank is a U.S.-based financial intermediary that serves the foreign exchange market. Assume that this bank is willing to both purchase and sell currency for the same rate. In other words, assume there is no bid/ask spread. Suppose Cloudastries has made the following direct quotations: Additionally, Cloudastries has quoted a cross exchange rate of f euro =2.02 pesos. Based on the spot rates in the table, the cross exchange rate of the euro should be equal to pesos, rather than the 2,02 pesos per euro that the bank is quoting