The spot exchange rate for USD /euro is 1.15; the forward rate in 6 months for USD / euro is 1.12. the US interest rate is 1.5% per year while the Europe interest rate is 2.5% per year. You have 1,000,000 euros to invest.

a) Explain Covered Interest Arbitrage.

b) Calculate the amount of USD you will have in 6 months, including interest income, by converting the euro into a spot rate and investing in the US interest rate;

c) Calculate the amount of euro you will have in one year by converting the USD back to Euro using the forward rate;

d) What will be the arbitrage profit in 6 months for 1,000,000 Euro using Covered Interest Arbitrage?