1. (7 points) Currently, the spot exchange rate is $1.50/ and the three-month forward exchange rate is $1.52/. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or 1,000,000. a. (1 points) Determine whether the interest rate parity is currently holding. b. (4 points) If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. c. (2 points) Explain how the IRP will be restored as a result of covered arbitrage activities. 2. ( 2 points) As of November 1,1999 , the exchange rate between the Brazilian real and U.S. dollar is R$1.95/$. The consensus forecast for the U.S. and Brazil inflation rates for the next 1 -year period is 2.6% and 20.0%, respectively. What would you forecast the exchange rate to be at around November 1,2000 , using relative purchasing power parity