1. Consider the following information:

• On the FOREX market, an American bank gives the following quotes

:$ = 1.2010-1.2060

:$ = 1.7960-1.8010

• A British bank gives the following quote:

: = 1.5060-1.5080

Is there an arbitrage opportunity?Why or why not? If yes, what is the arbitrage profit? Use $1,000,000.

2. Consider the following:

• Spot rate = 1.6400 $/pound sterling
• 90 day Forward rate = 1.6236 $/pound sterling
• U.S. risk free rate = 1.15%
• UK risk free rate = 3.75%

1. Does IRP hold?
2. If not, show how much profit can be earned by covered interest arbitrage? Use $1,000,000 or 1,000,000.