Suppose that the current spot exchange rate of the GBP is USD 1.2515 / GBP and the 3-month forward exchange rate is USD $1.3044 / GBP. The 3-month interest rate is 2.4% per annum in the US and 0.8% per annum in Britain. Assume that you can borrow USD 1,000,000 or its GBP equivalent.

1. Determine whether interest rate parity is currently holding.

2. If IRP is not holding, how would you carry out covered interest arbitrage (CIA)? Show all the steps and determine the arbitrage profit. Assume you choose to keep your profits in US dollars.