Question: QUESTION 3 (25 MARKS) Currently, the spot exchange rate is 0.9050__/$ and the three-month forward exchange rate is 0.9605 _/$ (Please refer to the assigned

QUESTION 3 (25 MARKS) Currently, the spot exchange rate is 0.9050__/$ and the three-month forward exchange rate is 0.9605 _/$ (Please refer to the assigned figures in Table 3 below). The three-month interest rate is 2.8% per annum in the U.S. and 1.6% per annum in France. Assume that you can borrow as much as $1,000,000 or 905000 (Please refer to the assigned figures in Table 3 below). a. Determine whether the interest rate parity is currently holding. (7 marks) b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. (12 marks) Explain how the IRP will be restored as a result of covered arbitrage activities. (6 marks) c

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