1. (7 points) Currently, the spot exchange rate is $1.40/E and the six-month forward exchange rate is S1.38/. The six-month interest rate is 4.0% per annum in the US, and 2% per annum in the U.K. Assume that you can borrow as much as S1,400,000 (in the US) or ,000,000 (in the U.K.) a. Determine whether the interest rate parity (IRP) is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. [Hint: Step 1: borrow money. You first need to determine whether US investor or UK investor can capitalize] c. Explain how the IRP will be restored as a result of covered arbitrage activities. [i.e. what changes might happen?] 2. (4 points) Assume you have 3 forex quotations: 1 NZD 0.73 USD, 1 MXP = 0.05 USD and 1 NZD = 13.8 MXP. Is there triangular arbitrage opportunity? If yes, what is the arbitrage profit assuming you have US$1 million