1. Suppose that you have the following information:
   1. No transactions costs and no restrictions on short-selling.
   2. The spot exchange rate is e(USD/GBP) = 1.3121
   3. The 1-year forward exchange rate is f(USD/GBP) = 1.3321
   4. The return on GBP-denominated riskfree T-bills is r(GBP) = 0.50%
   5. The return on USD-denominated riskfree T-bills is r(USD) = 0.75%

Answer the following questions:

1. If i.v. are correct, draw a graph of international interest rate parity, list the transaction details, and prove that there is or there is not a covered interest arbitrage opportunity.

2. Would the USD have to appreciate or depreciate against the GBP in the spot market for this market to be in equilibrium, holding i. and iii.-v. as is? By how much?

3. A trader decides to conduct a carry trade. What is the break-even spot market exchange rate in one year between the USD and GBP for this carry trade to be profitable? If the spot exchange rate GBPUSD in one year is actually 1.3028, would the trader lose or gain on this carry trade? By how much?