Currently, the spot exchange rate is $$1\mathrm{.}67$ per $$ and the three$-$month forward exchange rate is $$1\mathrm{.}69$ per $.$ The three$-$month interest

rate is $8\mathrm{.}0\%$ per annum in the U$.$S$.$ and $5\mathrm{.}8\%$ per annum in the U$.$K$.$ Assume that you can borrow as much as $$1,670,000$ or $1,000,000.$

Required:

a$.$ Determine whether the interest rate parity is currently holding.

b$.$ If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit?

c$.$ Explain how the IRP will be restored as a result of covered arbitrage activities.

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Determine whether the interest rate parity is currently holding.

Determine whether the interest rate parity is currently holding.Currently, the spot exchange rate is $$1\mathrm{.}67$ per $$ and the three$-$month forward exchange rate is $$1\mathrm{.}69$ per $.$ The three$-$month interest rate is $8\mathrm{.}0\%$ per annum in the U$.$S$.$ and $5\mathrm{.}8\%$ per annum in the U$.$K$.$ Assume that you can borrow as much as $$1,670,000$ or $1,000,000.$

Required:

Determine whether the interest rate parity is currently holding.

If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit?

Explain how the IRP will be restored as a result of covered arbitrage activities.