Currently, the spot exchange rate is $1.30/Euro and the six month forward exchange rate is $1.25/Euro. The six month interest rate is 4.7% per annum in the U.S. and 5.7% per annum in the UK. Assume you can borrow as much as $1,300,000 in the US or 1,000,000 Euro in the UK

A) Determine whether the Interest Rate Parity (IRP) is currently holding

B) If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

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