Suppose that the current spot exchange rate is $\frac{1\mathrm{.}50}{}$ and the one$-$year forward

exchange rate is $\frac{1\mathrm{.}60}{}.$ The one$-$year interest rate is $5\mathrm{.}4$ percent in euros and $5\mathrm{.}2$

percent in pounds. You can borrow at most $1,000,000$ or the equivalent pound amount,

that is$,666,667,$ at the current spot exchange rate.

You should thus borrow in $(,)$ and lend in $|.$

Your arbitrage profit will be $$

As a result of the above arbitrage transactions, the euro interest rate will

the

pound interest rate will will

the interest rate parity is restored.