Assume the following information:
• British pound spot rate = $1.58
• British pound one-year forward rate = $1.58
• British one-year interest rate = 11%
• U.S. one-year interest rate = 9%
Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9 percent. What would be their yield? Explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.