Arbitrage Opportunities - You have information on the interest rates in Mexico and Peru. Assume you are told that the existing oneyear interest rate in Mexico is 8 percent and the oneyear interest rate in Peru is 13 percent. Also assume that interest rate parity exists.

a) Should the forward rate of the Sol (i.e., the Peruvian currency) exhibit a discount or a premium?

b) If Mexican investors attempt to engage in covered interest arbitrage, what will be their return?

c) If Peruvian investors attempt to engage in covered interest arbitrage, what will be their return?

d) Can you establish whether locational arbitrage is feasible in this set-up?

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