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Suppose that the annual interest rate is $5$ percent in the United States and $8$ percent in Turkey, and that the spot exchange rate is USD$0\mathrm{.}0742/$TRY and the forward exchange rate, with one$-$year maturity, is USD$0\mathrm{.}0737/$TRY$.$ Assume that you can borrow up to $$1,000,000.$

$(10$ points$)$ Show whether or not IRP is holding under current market conditions.

$(15$ points$)$ Demonstrate how you can take advantage of an arbitrage opportunity, if any. Step $1$:

Step $2$:

Step $3$:

$3.(10$ points$)$ Compute any arbitrage profit $($guaranteed profit$),$ if any.

$4.(15$ points$)$ Describe how arbitrage activities affect currency spot and forward markets and two countries' credit markets such that IRP holds.