Show all the steps and determine the arbitrage profit

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Reference no: EM132829959

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

Problem a) Determine whether the interest rate parity (IRP) is currently holding.

Problem b) If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

Problem c) Discuss how the interest rate parity (IRP) will be restored as a result of covered arbitrage activities.

Reference no: EM132829959

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