Suppose 1-year dollar interest rate is 5% p.a., and for the same maturity interest rate is 7%. The pound is at 3% discount against dollar in the one-year forward market. Which of the following statements is most appropriate?

Multiple Choice

A. Since the gain to be made due to the higher interest rate in pound is only partially offset by discount on pound against dollar, an arbitrager will borrow in dollar and invest in pound.

B. Since the loss to be suffered due to the lower interest rate in dollar is fully compensated by discount on pound against dollar, funds will flow from pound to dollar.

C. Since the gain to be made due to the higher interest rate in pound is more than offset by the discount on pound against dollar, an arbitrager will borrow in pound and invest in dollar.

D. The Interest Rate Parity holds and there are no incentives to make arbitrage profits