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Currently, the spot exchange rate is $1.50/ and the three-month forward exchange rate is $1.52/. The three-month interest rate is 8.0% per annum in the
- Currently, the spot exchange rate is $1.50/ and the three-month forward exchange rate is $1.52/. The three-month interest rate is 8.0% per annum in the U.S.and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or 1,000,000 (8 marks)
- Determine whether the interest rate parity is currently holding.
- If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.
- Explain how the IRP will be restored as a result of covered arbitrage activities
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