Covered interest arbitrage in both directions. Assume that the existing UK one-year interest rate is 10 per

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Covered interest arbitrage in both directions. Assume that the existing UK one-year interest rate is 10 per cent and the EU one-year interest rate is 11 per cent. Also assume that interest rate parity exists. Should the forward rate of the euro exhibit a discount or a premium?

a If UK investors attempt covered interest arbitrage, what will be their return?

b If eurozone investors attempt covered interest arbitrage, what will be their return?

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