3. Covered Interest Arbitrage (11 points) Assume the following market quotes information, where the interest rates are quoted in annualized forms and have terms of 180 days: (You are the bank's customer, and EUR represents the euro.) Si(EURUSD) = 1.1200 (current spot exchange rate in EURUSD) F.180(EURUSD) = 1.1100/1.11 20 (180-day forward exchange rate in EURUSD, quoted as of now) IEUR = 1.20% (annualized 180-day nominal interest rate in EUR) iUSD = 0.40% (annualized 180-day nominal interest rate in USD) Questions: a. Based on covered interest rate parity (IRP), what is the arbitrage-free forward exchange rate in 180 days? (2 points) b. Given this market quotes information, is covered interest arbitrage possible? (1 point) Why? (2 points) c. Design a covered arbitrage strategy and calculate its profits. (4 points) d. Calculate the forward premium and compare it to the interest rate differential. Based on these numbers, what kind of capital flows will the eurozone economy experience? (2 points)