Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.58/₤. The one-year interest rate is 6.0% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate.
i. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit.
ii. Discuss how the interest rate parity may be restored as a result of the above transactions.
iii. Suppose you are a pound-based investor. Show the covered arbitrage process and determine the pound profit amount.

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Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.58/₤. The one-year interest rate is 6.0% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate.
i. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit. 
ii. Discuss how the interest rate parity may be restored as a result of the above transactions. 
iii. Suppose you are a pound-based investor. Show the covered arbitrage process and determine the pound profit amount.

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