Suppose that the current spot exchange rate is 1.50/ and the one-year forward exchange rate is0.625/. The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exchange rate

1. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume thatyou are a euro-based investor. Also determine the size of the arbitrage profit. (1 point

)2. Assume that you want to realize profit in terms of . Show the covered arbitrage process anddetermine the pound profit amount.