Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is 1.60/. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most 1,500,000 or the equivalent pound amount, that is, 1,000,000, at the current spot exchange rate.

A. Assume that you are a euro-based investor. Show how you realize a guaranteed profit from covered interest arbitrage. (5 points)

B. Assume that you are a pound-based investor. Show the covered interest arbitrage process and determine the pound profit amount. (3 points)