Please show your work in excel.

3. 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 percent per annum in the U.S and 5.8 percent annum in the U.K. Assume that you can borrow as much as $1,500,000 or 1,000,000.

a. Determine whether interest rate parity is currently holding.

b. If IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

c. Explain how IRP will be restored as a result of covered arbitrage activities.

5. Suppose that the current spot exchange rate is 0.80/$ and the three-month forward exchange rate is 0.7813/$. The three-month interest rate is 5.6 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or 800,000.

a. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S dollars. Also determine the size of your arbitrage profit.

b. Assume that you to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros.

7. As of November 1, 1999, the exchange rate between the Brazilian real and U.S. dollar was R$1.95/$. The consensus forecast for the U.S. and Brazil inflation rates for the next one-year period was 2.6 percent and 20.0 percent, respectively. What would you have forecast the exchange rate to be at around November 1, 2000?

9. Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.60/. The one year interest rate is 5.4 percent in euros and 5.2 percent in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, that is, 666,667, at the current spot exchange rate.

a. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit.

b. Discuss how the interest rate parity may be restored as a result of the above transactions.

c. Suppose you are a pound-based investor. Show the covered arbitrage process and determine the pound profit amount.