Currently, the spot exchange rate is $1.16/ and the three-month forward exchange rate is $1.20/. The three-month interest rate is 2.0% per annum in the U.S. and 6% per annum in Germany. Assume that you can borrow as much as $1,160,000 (in the US) or 1,000,000 (in Germany). a. Determine whether the interest rate parity (IRP) is currently holding. ( 3 pts) b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. (4 pts) c. Explain how the IRP will be restored as a result of covered arbitrage activities. [i.e. what changes might happen to the forward exchange rate?] ( 2 pts) Cristiano Ronaldo specializes in cross-rate arbitrage. He notices the following quotes: 1CHF=1.06USD(1) 1AUD=0.78 USD (2) 1CHF=1.28AUD(3) [CHF: Swiss franc, AUD: Australian dollar] Ignoring transaction costs, is there an arbitrage opportunity? If yes, calculate the arbitrage profit Cristiano could earn if he has US\$1,000,000 available for this purpose? What market forces would occur to eliminate any further possibilities of triangular arbitrage? The United States has imposed tariffs on Chinese goods, including steel and aluminum products. What is the likely impact on (1) U.S. steel and aluminum manufacturers, (2) other U.S. corporations that rely on the materials, and (3) U.S. consumers? China's foreign-exchange reserves "fall to lowest levels in nearly six years" (WSJ 1/8/2017). One analyst said that the Chinese government had been selling its forex reserves to keep the value of the yuan low and by doing so, it can promote Chinese exports. Do you agree with this argument? Why