The spot exchange rate is $1.50/, and the three-month forward exchange rate is $1.52/. The three-month interest rate is 8.0% per annum in the U.S., and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or 1,000,000. a. Determine whether the interest rate parity is currently holding.

b. How would you carry out covered interest arbitrage if the IRP is not holding?

Show all the steps and determine the arbitrage profit.

c. Explain how the IRP will be restored due to covered arbitrage activities.