Determine whether interest rate parity is holding

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Reference no: EM13729484

Consider a spot exchange rate of $1.40/£ and a 3-month forward exchange rate of $1.43/£. Assume a 3-month interest rate of 7.6% p.a. in the U.S. and 4.8% p.a. in the U.K. Assume that you can borrow as much as $1,000,000.

a. Determine whether interest rate parity is holding. (Answer yes or no and show why.)

b. If IRP does not hold, calculate your profit

Reference no: EM13729484

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