1. Suppose that the current spot exchange rate is SASK($1.2500/) and the one-year forward exchange rate is FWBID($1.500/). The average one-year U.S. CD (Certificate of Deposit) interest rate is 10.0% and the average one-year U.K. CD interest rate is 5.0%. You can borrow at most $1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exchange rate. 1 (5 points). Describe Interest Rate Parity (IRP) relationship. 2 (5 points). Define "Covered Interest Arbitrage." 3 (10 points). Show whether or not interest rate parity (IRP) relationship holds. 4 (15 points). Illustrate the steps of how you can realize a guaranteed profit from covered interest arbitrage. 5 (5 points). Compute the size of the arbitrage profit. II. Year 2018 2019 2020 2021 Histoncal Inflation and Interest Data, the US and the UK Interest Rate Spot EXR Inflation Rate US UK US UK 5% 3% 1.0000 3% 5% 1.0500 2% 10% 5% 2% 1.1000 5% 3% 2% 5% 1.0500 1 (10 points). Given the historical financial data in Table above, generate predicted spot exchange rates foie Years 2019, 2000, and 2021 using the IRP and RPPP models. 21 Page 2(10 points). Using the values trom Question 1, compute the Mean Absolute Percentage Error (MAPE) of the IRP and the RPPP models