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Suppose that the current Japanese one-year interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $.0090 and the one-year forward rate of the Japanese yen is $.0097. Assume zero transactions costs.

a. Which of the following statements is accurate:

1. Interest rate parity holds—the quoted forward rate for the yen is where it should be.
2. Interest rate parity holds—the quoted spot rate for the yen is where it should be.
3. Interest rate parity does not hold—the quoted forward rate for the yen is too low.
4. Interest rate parity does not hold—the quoted forward rate for the yen is too high.

b. Based on these rates, who could profit from covered interest arbitrage?

A. U.S. investors holding dollars. B. Japanese investors holding yen. C. Both U.S. investors holding dollars and Japanese investors holding yen. D. Neither U.S. investors holding dollars nor Japanese investors holding yen.