Currently the spot exchange rate is gbpusd 12559 and the, Ask an Expert

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Currently, the spot exchange rate is GBP/USD = 1.2559 and the three-month forward exchange rate is GBP/USD = 1.2587. The three-month interest rate is 0.50% per annum in the U.S. and 0.08% per annum in the U.K. Assume that you can borrow as much as $3,000,000 or £2,000,000. a. Determine whether the interest rate parity is currently holding. b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. c. Explain how the IRP will be restored as a result of covered arbitrage activities in the market.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92648928

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