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(Total: 40 marks) QUESTION THREE 2) Suppose that the current spot exchange rate is 1.sora rate is 1.60/E. The one-year interest rate is 5,4% in
(Total: 40 marks) QUESTION THREE 2) Suppose that the current spot exchange rate is 1.sora rate is 1.60/E. The one-year interest rate is 5,4% in euros al t exchange rate is 1.50/L and the one-year forward exchange interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most 1,000,000 or the equivalent pound amount, i.e., 666,667, at the current spot exch rate. Required Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit. (10 marks) Discuss how the interest rate parity may be restored because of the above transactions. (10 marks) - fornirn av hande market (ii)
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