Instructions: (1) Include each currency symbol in each cash flow. (-1 point for not including currency symbol) (2) Include + for cash inflows and - for cash outflows. (-1 point for not including + or -)

1. Suppose the annual interest rate is 4.5% in U.S. and 3% in U.K., and that the spot exchange rate is S(USD/GBP) = 2815 (i.e., GBP 1 = USD 1.2815) and the forward exchange rate with 12-month maturity is F₁₂(USD/GBP) = 3150 (i.e., GBP 1 = USD 1.3150). Assume you are a U.S. trader and can borrow up to USD 1,000,000 (or GBP 1,000,000). Answer the following questions. a. Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information? (show your work!) b. Show the strategy to capture the arbitrage profit by setting up a transaction table. Listing the required transactions and cash flows (including cash flow signs and currency symbols). Your arbitrage profit should be in U.S. dollar.
2. Suppose the annual interest rate is 4.5% in U.S. and 2% in Japan, and that the spot exchange rate is S(JPY/USD) = 111.25 (i.e., USD 1 = JPY 111.25) and the forward exchange rate with 12-month maturity is F₁₂(JPY/USD) = 109.25 (i.e., USD 1 = JPY 109.25). Assume you are a U.S. trader and can borrow up to USD 1,000,000 (or JPY 100,000,000). Answer the following questions. a. Is there an arbitrage opportunity according to the Interest Rate Parity based on the above information? (show your work!) b. Show the strategy to capture the arbitrage profit by setting up a transaction table. Listing the required transactions and cash flows (including cash flow signs and currency symbols). Your arbitrage profit should be in U.S. dollar.