a$)$ Briefly discuss $$What is Arbitrage$$

b$)$ Suppose the interest rate on $$ is $12\%$ in London, and the interest rate on a

comparable dollar investment in New York is $7\%.$ The $$ spot rate is $$1\mathrm{.}75$ One$-$year

forward rate is $$1\mathrm{.}68.$

Required:

$($i$)$ Are there opportunities for covered interest arbitrage?

$($ii$)$ Show how an arbitrageur can exploit any opportunity associated with covered

interest arbitrage

$($iii$)$ Illustrate the profits associated with opportunity in $($i & ii$)$ above by showing the

steps that an arbitrageur can take to profit from the discrepancy in rates based on

$$1,000,000$ transaction. Assume that the borrowing and lending rates are identical

and the bid$-$ask spread in the spot and forward market is zero