problem 3

U. S, and 5.7 % o per annum in the U.K. Assume that you can borrow as much as $1.300,000 (in the US) or 1,000,000 (in the U.K.). a. Determine whether the interest rate parity (IRP) is currently holding b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. [Hint: Step 1: borrow money. You need to determine whether US investor or UK investor can borrow and capitalize] c. Explain how the IRP will be restored as a result of covered arbitrage activities. 3. (Triangular Arbitrage - 5 pts) You observe the following quotes: 1 GBP 1.3 USD (1); 1 MXN 0.052 USD (2); and 1 GBP 30 MXN (3) Is there triangular arbitrage opportunity? How much would the arbitrage profit be if you have Si million USD to start with