1. Describe what you observe in the following figure about pound-mark market. 2. What can you say about arbitrage opportunities during the different time periods shown in the figure? 3. What do you suspect as the reason of the data patterns you observe?

Profit implied 15% by deviation from CIP Return on German deposits minus (% per annum) return on U.K. deposits (in {) 10 1979: U.K. capital controls abolished 5 1981: German capital controls abolished 0 -5 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994