IRP arbitrage2

a.

If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 5 percent, the spot exchange rate is $1.3152/1, and interest rate parity holds, what must be the one-year forward exchange rate? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

One-year forward exchange rate

$ per

b.

If the forward rate is actually $1.2776/1, would you borrow in dollars or pounds to make an arbitrage profit?

multiple choice

Dollars

Pounds

c.

If you can borrow either $1 million or 1 million (borrow in currency identified in previous part) to capitalize on the arbitrage profit using the actual forward rate of $1.2776/1, what is your arbitrage profit at the end of the year expressed in $dollars? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

Arbitrage profit in $

$