(Applying interest rate parity) Peter has gathered the following information and quotes for the British and Swiss forex markets.

Spot exchange rate CHF1.2151/£

Six-month forward exchange rate CHF1.1922/£

GBP interest rate (6 months) 2.5% per year CHF interest rate (6 months) 2.0% per year

a. Is the interest rate parity holding? Ignore transaction cost for your calculations.

b. Identify the arbitrage opportunity and show what steps need to be taken to make arbitrage profit. Let’s assume that Peter has access to funds up to £1,000,000 that he can use to exploit the opportunity. Calculate the arbitrage profit that can be earned in dollars.