Suppose the six-month interest rates in Japan and the United States are 7% per year, compounded semi-annually, and 9% per year, compounded semi-annually, respectively. The spot rate is ¥142 : $1 (i.e., ¥/$ 142), and the 6 month forward rate is ¥139 : $1. Given this fact situation: a) Where should you invest? b) Where should you borrow? c) Quantify the arbitrage profit, if any, that can be obtained on a $1 million dollar-equivalent investment? Solution (1+i$)=1.045 is greater than(F/S) (1+iy) =1.013; So borrow Yen from Japan and Invest in Dolller in United States as the value is more in United states a) Better to invest in United States b) Better to borrow from Japan.