(IRP Arbitrage - 15 Points - Answewr ALL Parts A, B, C)

Spot exchange rate	S(GBP/EUR)	=	1.15
360-day forward rate	F360(GBP/EUR)	=	1.20
U.K. interest rate	IUK	=	10.0%
EU interest rate	IEU	=	5.0%

A) What is the theoretical Forward rate that should prevail in this market under IRP?

B) As a UK investor how would you exploit the arbitrage opportunity? YOU MUST: Outline all steps necessary and determine the GBP profit that an investor could net on a 1,000GBP basis NOTE: GBP profit can be determined as of today, time = 0 days OR in the future, time = 360 days (your choice).

C)What factors (list at least 2) keep arbitrage opportunities like this from occurring in practice?