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2 Currently, the spot exchange rate is $1.61 per and the three-month forward exchange rate is $1.63 per . The three-month interest rate is 8.0%
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Currently, the spot exchange rate is $1.61 per and the three-month forward exchange rate is $1.63 per . 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 $1,610,000 or 1,000,000. Required: a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? c. Explain how the IRP will be restored as a result of covered arbitrage activities. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Note: Do not round intermediate calculations. \begin{tabular}{|l|l|} \hline \begin{tabular}{l} Interest \\ arbitrage \end{tabular} & \begin{tabular}{l} Borrow in the U.S. and invest in the U.K. Hedge exchange rate risk by selling British pounds \\ forward. \end{tabular} \\ \hline Arbitrage profit & S \\ \hline \end{tabular} Step by Step Solution
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