Currently, the spot exchange rate is $1.50/ and the three-month forward exchange rate is $1.52/. The three-month

Question:

Currently, the spot is $1.50/£ and the three-month forward is $1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S. and 5.8 percent per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.
a. Determine whether interest rate parity is currently holding.
b. If IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.
c. Explain how IRP will be restored as a result of covered arbitrage activities.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...