Current one-year interest rate for USD LIBOR: 5.25%
Current one-year interest rate for Sterling (UK) LIBOR: 4.25%
Current spot ex-rate (S): = $1.5200/£
Current one-year forward rate (F) = $1.5428/£
1. a. Given the information above, is the British pound selling at a premium or discount? How much (round to two decimal places, e.g. 1.35%)?
b. Is Interest Rate Parity (IRP) holding? Why or why not? Explain in an essay, and show a calculation to support your answer using this IRP formula: ius = iuk +/- %£
c. Given the information above, how could you make arbitrage profits, starting with either $5 million or £5 million? Calculate and report your profits, and explain each calculation in words.