A foreign exchange trader is evaluating arbitrage opportunities for $10,000,000 USD (or its JPY equivalent)....
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A foreign exchange trader is evaluating arbitrage opportunities for $10,000,000 USD (or its JPY equivalent). The 6-month interest rate for USD is 3.95% and for JPY is 2.50%. The spot rate for USD/JPY is 128.50, and the 6-month forward rate (all-in) is 127.55. What profit opportunity, if any, is available to the trader using covered arbitrage?
a. Both currencies provide the same potential profit - there is no arbitrage profit opportunity.
b. There is a covered arbitrage profit opportunity by investing in the higher-yielding currency.
c. There is a covered arbitrage profit opportunity by investing in the lower-yielding currency.
d. Not enough information to answer the question.
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