Consider the following information available in Diamond Bank located in a neighborhood near you.

         Spot Rate for the British Pound Sterling                                                                 $1.60

         90 – day forward rate of the pound                                                                         $1.59

         90 – day UK interest rate                                                                                               4%

         90 – day U.S. interest rate                                                                                             3%

(a) Given this information, would it be a prudent strategy for Diamond Bank to engage in covered interest arbitrage? Explain.

(b) If covered interest arbitrage is profitable how much profit would the Bank earn if it uses $1,000,000?

(c) Briefly discuss the realignment process that will yield interest rate parity.