The spot rate between the U.K. and the U.S. is £0.6789 = $1, while the 1-year forward rate is £0.6782 = $1. The risk-free rate in the U.K. is 3.1 percent. The risk-free rate in the U.S. is 2.9 percent. How much profit can you earn on a loan of $2,000 by utilizing covered interest arbitrage?

Question

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Covered interest arbitrage involves converting $2,000 to pounds at the spot rate, investing at the U.K. risk-free rate, and converting back at the forward rate. The profit is calculated by comparing the final amount in dollars with the initial $2,000.

The Spot Rate Between the U