A trader observes the following market information and sees an opportunity to make an arbitrage profit.

The spot rate is 82 yen per dollar, while the 1-year forward rate is 80.20 yen per dollar. The nominal risk-free rate is 1% in Japan and 2.5% in Canada. 

a. Do the relevant calculation for each of the following steps. Calculate: 

(1) The number of yen the trader receives if he borrows $1,000,000 and converts it to yen at the current spot rate.

(2) The interest received if he invests the yen at the Japanese 1 year risk-free rate. 

(3) The amount of yen (both principal and interest) he will lock into and exchange for dollars in 1 year, using a 1-year forward contract, and the amount of dollars received in 1 year. 

(4) The amount of dollars (both principal and interest) he will repay at year end. 

(5) The remaining profit. 

b. Briefly explain how this arbitrage profit is possible.