British pound selling at a premium or discount

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Reference no: EM131011512

Current one-year interest rate for USD LIBOR: 5.25%

Current one-year interest rate for Sterling (UK) LIBOR: 4.25%

Current spot ex-rate (S): = $1.5200/£

Current one-year forward rate (F) = $1.5428/£

1. a. Given the information above, is the British pound selling at a premium or discount? How much (round to two decimal places, e.g. 1.35%)?

b. Is Interest Rate Parity (IRP) holding? Why or why not? Explain in an essay, and show a calculation to support your answer using this IRP formula: ius = iuk +/- %£

c. Given the information above, how could you make arbitrage profits, starting with either $5 million or £5 million? Calculate and report your profits, and explain each calculation in words.

Reference no: EM131011512

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