Suppose that the six-month interest rate in the United States is 5%, while the six-month interest rate in Mexico is 8%. Further, assume the spot rate of the peso is $0.40.

Suppose that you have $500,000 with which to attempt covered interest arbitrage. Assume the forward rate is $0.38889, 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 (at the spot rate of $0.40) for 1,250,000peso. After depositing these funds for 6 months, and earning a return of 8%, your deposit grows to 1,350,000peso.

When you convert your 1,350,000peso back to dollars, you end up with approximately __________ ( a.$420,001.20 | B.$630,001.80 | C.$682,501.95 | D.$525,001.50 ) for a profit of about __________ ( A.$25,001.50 | B. $27,501.65 ) over your original $500,000.

However, had you simply deposited your $500,000 in an account and accrued 5% interest, you would have _________ ( a.$420,000.00 | B.$630,000.00 | C.$682,500.00 | D.$525,000.00 ) , for a profit of ____________ .( A. $27,501.65 | B. 25,000 )

This example illustrates that covered interest arbitrage ______________ ( A. Does | B. Doesn't ) offer a significantly larger return than simply depositing the funds in a domestic account under interest rate parity.