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Currently the spot exchange rate is $1.33/ and the one year forward exchange rate is $1.32/. The yearly interest rate is 1% in US and

Currently the spot exchange rate is $1.33/ and the one year forward exchange rate is $1.32/. The yearly interest rate is 1% in US and 3% in U.K. Assume you can borrow as much as $1,330,000.

a. Is interest rate parity currently (IRP) holding?

b. If IRP is not holding, how would you execute a covered interest arbitrage? Show all the steps what you are going to do today and in one year. Also determine the arbitrage profit.

c. Explain how IRP will be restored as a result of the above arbitrage strategy?

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