One-year U.S. Interest Rates = 7%

One-year U.K. Interest Rates = 9%

One year $/ forward rate = 1.26

Current $/ spot rate = 1.32

Based on the abovemarket statistics,Hedi tells Liang the following strategy andarbitrageprofits:

Strategy:Since the forward rate islowerthan what the interest rate parity indicates, we would borrow British pounds, convert to dollars at the spot rate, and lend dollars.

Arbitrage profit: If we borrow10,000 and after paying the borrowing cost, we would profit $390 from the transactions.

With respect to abovearbitragestrategy and profit isHedi correct?

a. only strategy correct

b. only profit correct

c. both are correct