Suppose that the annual interest rate is 5% in the U.S and 8% in the UK and that the spot

exchange rate is $1.80 to the UK pound sterling. Consider that the forward exchange rate , with

one -year maturity, is $1.78 to the pound sterling. If an arbitrager has the capacity to borrow either

$1,000,000 or the pound sterling equivalent at the current spot foreign exchange rate,

(b1)Evaluate the feasibility of covered interest arbitrage for this investor.

(b2)Determine the profit that the investor could earn upon conclusion of the investment process.

(b3)Briefly discuss the realignment process that would close the opportunities for further arbitrage.