Currently, the spot exchange rate is $$1\mathrm{.}63$ per $$ and the three$-$month forward exchange rate is $$1\mathrm{.}65$ per $.$ The three$-$month interest rate is $8\mathrm{.}0\%$ per annum in the U$.$S$.$ and $5\mathrm{.}8\%$ per annum in the U$.$K$.$ Assume that you can borrow as much as $$1,630,000$ or $1,000,000.$ 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 buying British pounds forward.

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

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

Borrow in the U$.$K$.$ and in

Arbitrage profit

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

Covered arbitrage activities:

The dollar interest rate will rise; The pound interest rate will fall; The spot exchange rate will rise; The forward exchange rate will fall.

The dollar interest rate will rise; The pound interest rate will fall; The spot exchange rate will fall; The forward exchange rate will rise.

The dollar interest rate will fall; The pound interest rate will rise; The spot exchange rate will rise; The forward exchange rate will fall.