5 Draw a figure like Figure 8.4 to show what interest arbitrage will do to the interest-rate differentials and the forward premiums at points A to F in the table below. If all the r$ r£ S($/£) F1/4($/£)

5% 6% 1.5000 1.4985 adjustment to the interest parity occurs in the forward exchange rate, what will F1/12($/£) be after interest parity has been restored?

A B C D E F S($/£) 1.6200 1.6200 1.6200 1.6200 1.6200 1.6200 F1/12($/£) 1.6220 1.6150 1.6220 1.6150 1.6180 1.6120 r$(1 month), % 8.00 8.00 8.00 8.00 8.00 8.00 r£(1 month), % 10.00 9.00 8.00 7.00 6.00 5.00