As a trader for the AMBS Hedge fund, you see the following price quotes from a bank.

The price quotes are valid today:

1-year USD deposit/loan interest rate: 3.5% to 3.625% per annum

Spot exchange rates (bid-ask) USD 1.1602 / GBP USD 1.1642 / GBP

1-year forward exchange rates (bid-ask): USD 1.2500 / GBP; USD 1.2650 / GBP

The interest rates are quoted on a 360-day-year basis.

a) Assume that covered interest rate parity (CIP) holds. Derive the ranges of the

GBP deposit and loan interest rates are consistent with the CIP condition.

b) The following GBP deposit/loan interest rate is offered to you from a different

bank in the external currency market.

1-year GBP deposit/loan interest rate: 1.0% to 1.125% per annum

Explain clearly how covered interest arbitrage can be undertaken, and how the

no-arbitrage equilibrium can be recovered.