Suppose that the spot and the forward exchange rates between the UK pound () and the Euro () are S0=0.5108 / and Ft=3 months=0.5168 /. The time to maturity of the forward contract is 3 months. The annual interest rate of -denominated Eurocurrency market deposits is 4.08%. The annual interest rate of -denominated, 3-month Eurocurrency market deposits is 3.15%.

a) Examine whether there exists an arbitrage opportunity.

b) Devise an arbitrage strategy. Describe the transactions and calculate the arbitrage profits.