Suppose that the current spot exchange rate is 1.40/ and the one-year forward exchange rate is 1.50/. The one-year interest rate is 7% in euros and 6% in pounds. You can borrow at most 7,000,000 or the equivalent pound amount, that is 5,000,000 at the current spot exchange rate. Assume that you are a pound-based investor, what is the pound amount of the arbitrage profit if you carry out covered interest arbitrage?

• No answer provided
• a. 590,000
• b. 460,000
• c. 306,667
• d. 633,333