Current exchange rate is 1 = $1.82; the one-year forward rate is 1 = $1.77. US interest rates are 2% per annum; UK interest rates are 5% per annum. Suppose also that the maximum amount an agent can borrow in US dollars is $1m. In UK pounds, he can borrow up to 1m.

1. Explain how an agent could make money by arbitrage if his transactions costs are zero and if he can both borrow and lend at the interest rates given above. How much money can he make?