The interest rate is 2% on the dollar and 6% on the pound sterling. Also, the current spot rate is $1.6 = 1 and the one-year forward rate is $1.45 = 1. Is there an opportunity for covered interest arbitrage? If yes, what is the arbitrage profit in terms of a percentage?

Select one:

a.

No.

b.

Yes, 5.61%.

c.

Yes, 6.12%.

d.

Yes, 6.55%.

e.

Yes, 5.93%.

Can you please provide the explanation, formula and correct answer for the problem above?

I need specific step by step on how to solve the problem. The answer is D) "Yes, 6.55%." can you please explain how/why?