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Mr. Bernard specializes in cross-rate arbitrage. He notices that the current spot exchange rate is RM4.10/USD and the one-year forward exchange rate is RM4.20/USD. The one-year interest rate is 2.5% in Ringgit and 2.2% in US Dollars. Mr. Bernard is able to borrow RM1, 000,000 or an equivalent amount of USD243, 902.44 at the current spot exchange rate.
Required:
a) If Mr. Bernard is a Malaysian-based investor, is there a guaranteed profit from covered interest arbitrage? Calculate the amount of arbitrage profit or loss
b) Assume that Mr. Bernard is a US Dollar-based investor, determine the arbitrage process and calculate the amount of arbitrate profit or loss equivalent to the US Dollar.
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