Suppose that the current spot exchange rate is 1.61 per and the one-year forward exchange rate is 1.70 per . The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, i.e., 621,118, at the current spot exchange rate.

Required:

1. If you are a euro-based investor, how can you realize a guaranteed profit from covered interest arbitrage and the size of arbitrage profit?
2. How will the interest rate parity be restored as a result of the above transactions?
3. If you are a pound-based investor, what is the covered arbitrage process and the size of the arbitrage profit?