1. As a foreign exchange trader, you see the following quotes from two different banks:

UK pound () interest rates	2.0% 3.0% p.a.
South African (ZAR) interest rates	4.0% 5.0% p.a.
Spot exchange rates	ZAR 13.3/ ZAR 13.9/
6-month forward exchange rates	ZAR 12.6/ ZAR 13.2/

1. Is there an opportunity for covered interest arbitrage if you can borrow 1 million to invest in South African Rand? Clearly explain your answer and show all relevant calculations.

[25 marks]

2. Is there an opportunity for covered interest arbitrage if you can borrow ZAR1 million to invest in UK pounds? Clearly explain your answer and show all relevant calculations.

[25 marks]

3. Determine the range of 6-month forward rates for which there will be no arbitrage opportunity in both (i) and (ii) above.

[25 marks]

2. Do deviations from interest rate parity represent unexploited profit opportunities? Briefly discuss why an investor might not take on a covered interest arbitrage, even if the interest rate parity did not hold.