Question: Suppose that the current spot exchange rate is FF6.25/$ and the three-month forward exchange rate is FF6.28/$. The three-month interest rate is 5.6% per annum in the U.S. and 8.8% per annum in France. Assume that you can borrow up to $1,000,000 or FF6,250,000.

a. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the magnitude of arbitrage profit.

b. Assume that you want to realize profit in terms of French francs. Show the covered arbitrage process and determine the arbitrage profit in French francs.