Tom Brayton is a foreign exchange trader for a bank in London. He has GBP 10 million (or its USD equivalent) for a short-term money market investment and wonders if he should invest in GBP or in USD for 3 months. Given the following quotes, answer the questions here below:

Spot exchange rate USD/ GBP	$1.4300/GBP
3-month expected spot rate USD/ GBP	$1.4750/GBP
USD 3-month interest rate	6% per annum
GBP 3-month interest rate	4% per annum

a. Based upon the given data and Tom’s expectation about the spot rate, explain what should he do and what would his expected profit be equal to for an uncovered interest arbitrage?

b. If three months have passed and the actual USD/ GBP exchange rate is $1.4350/GBP rather than the expected $1.4750/GBP, then what would the investor’s actual profit or loss be?

c. Compare (a) and (b) results then evaluate