STEP: 3 of 3 Suppose that the six-month interest rate in the United States is 3%, while the six-month interest rate in Britain is 7%. Further, assume the spot rate of the pound is 1.6. Suppose that you have $500,000 with which to attempt covered interest arbitrage. Assume the forward rate is $1.54019, as you just calculated, and the interest rates are the same as have been used throughout this problem. To start, you exchange your $500,000 (at the spot rate of 1.6) for 312,500pound. After depositing these funds for 6 months, and eaming a return of 7%, your deposit grows to 334,375pound. When you convert your 334,375pound back to dollars, you end up with approximately over your original $500,000. However, had you simply deposited your $500,000 in an account and accrued 3% interest, you would have for a profit of about for a profit of This example illustrates that covered interest arbitrage domestic account under interest rate parity. TOTAL SCORE offer a significantly larger return than simply depositing the funds in a