Question: f Question 2 (3 marks) Citibank quotes US dollars per pound at $1.54 per , NatWest bank quotes euro per pound at 1.60 per ,

Question 2 (3 marks) Citibank quotes US dollars per pound at $1.54 per , NatWest bank quotes euro per pound at 1.60 per , Deutschebank quotes US dollars per euro at $0.97 per . What is the potential currency arbitrage profit of a trader at Citibank with $1,000,000 ? Show your calculations. Question 3 (6 marks) (a) What does the Interest Rate Parity theory postulate? (2 marks) (b) Provide a numerical example to illustrate the Interest Rate Parity theory. (2 marks) (c) Show the derivation of the Interest Rate Parity condition: F1/e0=(1+iH)/(1+iF). (2 marks)

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