Suppose vou are a UK-based investor and the interest rate on investments in UK is 0.85% pa. and the interest rate for comparable investments in UST is 1.35% p.a. Suppose further that the spot rate is GBP 0.7267 /USD and that the quoted one-year forward rate by the bank is GBP 0.7195 /USD a.) If covered interest rate holds, Is there an arbitrage opportunity? Why? b.) If yes, how high is it if you were able to borrow USD twenty million at the above rates from a US bank for one year? Please state the gain in USD.

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