c. Consider the spot exchange rate between the € and the pound sterling E€/£=1.50, while the annual forward exchange rate is F€/£=1.60. The annual interest rate is 5.4% in Italy and 5.2% in the UK....

Extracted text: c. Consider the spot exchange rate between the € and the pound sterling E€/£=1.50, while the annual forward exchange rate is F€/£=1.60. The annual interest rate is 5.4% in Italy and 5.2% in the UK. Assume that you can borrow up to €1,000,000 or £666,667, at the current spot exchange rate. i. Show how you can make profits from covered interest arbitrage. Consider you are an Italian investor. What is your profit? ii. Explain how the interest rate parity will be restored as a result of covered arbitrage activities. iii. Suppose you are a British investor. Show the covered arbitrage process and compute profits in terms of £. Note: Round your answers to the second decimal point.