b. Suppose that the forward rate is now F1$/=$1.20/ in slide #21, but all other values are the same. Describe the covered interest arbitrage strategy. Write down the arbitrage strategy and show how you obtain profits.

4.3 Interest Rate Parity and Covered Interest Arbitrage Interest rate parity is enforced through "covered interest arbitrage" An Example: i$ 7% i3% SoS/$1.20/ F,SIE$1.25/ Given: F,SIS(1+5)/ (1+i2) 1.0416671.038835 The currency and Eurocurrency markets are not in equilibrium