Suppose you are a foreign currency trader who is evaluating interest rate arbitrage opportunities. You have the following information.

Arbitrage Funds Available	$10,000,000.00 or 8,655,652.17
Spot Rate ( $/)	$1.1500/
3 month Forward Rate ( $/)	$1.2500/
U.S dollar 3- month interest rate	5.000%
Euro 3- month interest rate	4.000%

a. Determine whether there is an opportunity to profit from interest rate arbitrage.

b. Explain the steps you will take to profit from interest rate arbitrage and calculate the total profit. You must show your calculations and explain your reasoning to get full credit.

c. How will the money markets and foreign exchange market adjust to eliminate the profit opportunities?