8-13. Suppose the spot pound and the three-month forward pound are both selling for $2.00, while U.S.

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8-13. Suppose the spot pound and the three-month forward pound are both selling for $2.00, while U.S. interest rates are 10 percent and British interest rates are 6 percent.

Using covered-interest arbitrage theory, describe what will happen to the spot price of the pound, the three-month forward price of the pound, interest rates in the United States, and interest rates in the United Kingdom when arbitrageurs enter this market.

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