The spot exchange rate and the three-month forward exchange rate of sterling vis--vis the US dollar are quoted in New York as follows: So = $1.3129/ with a spread 127 - 131 F0,90 = $1.3396/ with a spread 394 - 399 The interest rate at which the trader can borrow or lend in the US is 3.45% per annum and that in the UK is 1.75% per annum now, and they are expected to remain unchanged in the next three months. Required: (a) Calculate and compare the forward premium and interest rate differential to verify that arbitrage opportunities may or may not exist in this case. (b) Set up procedures to exploit the arbitrage opportunities. Work out how big the arbitrage profit is, taking into account the transaction costs in the foreign exchange market as indicated by the bid-ask spread in the quotations