Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $.50 and HK$3.9. The one-year interest rate on the Australian dollar is 11%, while the one-year interest rate on the U.S. dollar is 7%. You believe in the international Fisher effect.You will receive A$1 million in one year from selling products to Australia, and will convert these proceeds into Hong Kong dollars in the spot market at that time to purchase imports from Hong Kong Suppose that you can either borrow or lend at a Thai Eurocurrency interest rate of 10% per year. Based on a $1 million initial amount, how much profit can you generate through covered interest arbitrage?
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