The following information has been extracted from a bank based on New York and the central banks of USA and Switzerland.

Spot exchange rate

SFr1.2251/$

Six-month forward exchange rate SFr1.1922/$

Six-month $ interest rate 2.25% per year

Six-month SFr interest rate 2.15% per year

a.Evaluate whetherinterest rate parity holds or not. Please ignore transaction cost.

b.Is there any covered interest arbitrage opportunity? What steps need to be taken to make arbitrage profit. Assuming that You start with $500,000, compute the percentage of arbitrage profit in dollars