Your friend, Shaleena is has $1 million (or its India rupee equivalent) for a short-term money market investment and wonders whether she should invest in U.S. dollars for one month or make a Covered Interest Arbitrage (CIA) investment in the rupee. She faces the following quotes:

Arbitrage funds available $1,000,000

Spot exchange rate (Rs/$) 73.823

1-month forward rate (Rs/$) 73.817

U.S. dollar 1-month interest rate 6%,

India rupee 1-month interest rate 3.5%.

(a) Show to Shaleena that there is a CIA opportunity.

(b) Explain the steps Shaleena must take in order to perform the CIA. Illustrate to her the CIA opportunity using a carry trade diagram.

(c) If the spot at the end of the CIA investment is 73.800/$,

i). what is the percentage CIA profit or loss for the activity performed according to Part (b)?

ii). what is the percentage arbitrage profit or loss, if Shaleena forgot to 'cover' her arbitrage investment as mentioned in Part (b)?