Currently, the spot exchange rate is $$1\mathrm{.}57$ per $$ and the three$-$month forward exchange rate is $$1\mathrm{.}59$ per $.$ The three$-$month interest

rate is $8\mathrm{.}0\%$ per annum in the U$.$S$.$ and $5\mathrm{.}8\%$ per annum in the U$.$K$.$ Assume that you can borrow as much as $$1,570,000$ or $1,000,000.$

Required:

a$.$ Determine whether the interest rate parity is currently holding.

b$.$ If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit?

c$.$ Explain how the IRP will be restored as a result of covered arbitrage activities.

Complete this question by entering your answers in the tabs below.

Explain how the IRP will be restored as a result of covered arbitrage activities.

Covered arbitrage activities

The dollar interest rate will rise; The pound interest rate will fall; the spot exchange rate will rise;

The forward exchange rate will fall.

The dollar interest rate will rise; The pound interest rate will fall; The spot exchange rate will fall;

The forward exchange rate will rise.

The dollar interest rate will fall; The pound interest rate will rise; The spot exchange rate will rise;

The forward exchange rate will fall.

The dollar interest rate will fall; The pound interest rate will rise; The spot exchange rate will fall;

The forward exchange rate will rise.