Suppose that you are given the following interest rate and currency data between the U.S. and British markets.

1-year forward rate (USD/GBP)

1.58

Spot rate (USD/GBP)

1.60

U.S. 1-year interest rate

6%

British 1-year rate

10%

a. Is there any arbitrage opportunity? Explain.

 

b. If one does exist, provide evidence and construct the appropriate strategy and compute the arbitrage profit (base your arbitrage strategy on 1 USD). Show all your work. Describe your strategy.