10. Covered Interest Arbitrage and Economic Theories (10 points) Assume the following market quotes information, where the interest rates are quoted in annualized forms and have terms of 30 days: (You are the bank's customer, and the GBP represents the British pound.) St(GBPUSD)=1.0950 (current spot exchange rate in GBPUSD) Ft,30(GBPUSD)=1.0975/1.0990 (30-day forward bid \& ask exchange rates in GBPUSD, quoted as of now) iGBP=2.25% (annualized 30-day nominal interest rate in GBP) iUSD =3.75% (annualized 30 -day nominal interest rate in USD) T=30 days Questions: a. Given this market quote information, is covered interest arbitrage possible? (1 point) Why? (2 points) b. Design a covered arbitrage strategy and calculate its profits. ( 5 points) c. Based on covered interest rate parity (IRP), what is your expectation for the exchange rate in 30 days? ( 2 points) 10. Covered Interest Arbitrage and Economic Theories (10 points) Assume the following market quotes information, where the interest rates are quoted in annualized forms and have terms of 30 days: (You are the bank's customer, and the GBP represents the British pound.) St(GBPUSD)=1.0950 (current spot exchange rate in GBPUSD) Ft,30(GBPUSD)=1.0975/1.0990 (30-day forward bid \& ask exchange rates in GBPUSD, quoted as of now) iGBP=2.25% (annualized 30-day nominal interest rate in GBP) iUSD =3.75% (annualized 30 -day nominal interest rate in USD) T=30 days Questions: a. Given this market quote information, is covered interest arbitrage possible? (1 point) Why? (2 points) b. Design a covered arbitrage strategy and calculate its profits. ( 5 points) c. Based on covered interest rate parity (IRP), what is your expectation for the exchange rate in 30 days? ( 2 points)