For the question, shows the detailed calculation and the formula you used. Suppose the two-year interest rates

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For the question, shows the detailed calculation and the formula you used.

Suppose the two-year interest rates in the UK and the United states are 7% and 3% respectively. The spot exchange rate between Pound Sterling (GBP) and the U.S. Dollar (USD) is 1.9458 USD/ GBP.

a. What should be the two-year forward exchange rate? Is the underlying asset at premium or at discount? Why?

b. Suppose your Bloomberg computer screen shows that the forward exchange rate is 1.8255 USD/ GBP. Are there any arbitrage opportunities? If there are arbitrage opportunities, explain how you will institute your strategy. Show your profit/loss from the strategy using 1000 USD/GBP investment.