Suppose the following exchange rates and interest rates prevail between the U.S. and Botswana:

Spot rate: $1 = 10.70 Botswana pula

One-year forward rate: $1 = 12.05 Botswana pula

One-year interest rates: U.S. = 5.25% Botswana = 16.22%

Covered interest arbitrage is possible in this scenario.

a) Explain how we know this and the strategy that should be employed to take advantage of it.

b) Calculate the per dollar potential profit.

c) Determine the forward exchange rate necessary to eliminate the arbitrage profit potential.