Question $1$

You are considering uncovered interest arbitrage between the pound $($GBP$)$ and the US dollar $($USD$).$ The following data is available to you:

Funds available: $2$ million GBP

Spot exchange rate: $1\mathrm{.}40$ USD per GBP

Spot exchange rate one year ago: $1\mathrm{.}26$ USD per GBP USD $3$ month interest rate: $2\mathrm{.}32\%$

GBP $3$ month interest rate: $0\mathrm{.}75\%$

Required:

a$)$ Calculate the profit that would be made if the exchange rate remains at its current level in $3$ months$$ time.

b$)$ How would the profit figure change if the US dollar continues to weaken at the same rate as it has done over the previous year?