Problem $6\mathrm{.}3$

Currently, the spot exchange rate is $$1\mathrm{.}66$ per $$ and the three$-$month forward exchange rate is $$1\mathrm{.}68$ per $.$ The three$-$month

interest rate is $8\mathrm{.}0\%$ per annum in the U$.$S$.$ and $5\mathrm{.}8\%$ per annum in the U$.$K$.$ Assume that you can borrow as much as

$$1,660,000$ or $1,000,000.$

Required:

a$.$ Determine whether the interest rate parity is currently holding.

b$.$ If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit?

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

Complete this question by entering your answers in the tabs below.

Required A

If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit?

Note: Do not round intermediate calculations.