Currently, the spot exchange rate is $$1\mathrm{.}65$ per $$ and the three$-$month forward exchange rate is $$1\mathrm{.}67$ 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 $$1,650,000$ 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.

Complete this question by entering your answers in the tabs below.

Required A

Requlired B

Required C

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

Note: Do not round intermediate calculations.

Interest arbitrage

Borrow in the U$.$S$.$ and invest in the U$.$K$.$ Hedge exchange rate risk by selling British pounds

forward.

Arbitrag