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The spot exchange rate is $1.50/£. The three-month forward exchange rate is $1.52/£. The 3-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Investors can borrow either $1,500,000 or the equivalent £ amount at the current spot rate.

(1) A US. MNC would like to invest its extra cash reserve of $1,500,000 for 3 months. How should the extra cash reserve be invested? Explain with calculations.

(2) Describe the covered interest arbitrage (CIA) by a dollar-based investor if such opportunity exists. Calculate the investor’s CIA profit if any.

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(3) Describe the covered interest arbitrage (CIA) by a pound-based investor if such opportunity exists. Calculate the investor’s CIA profit if any.

(4) Based on the given information, specify how CIA activities help restore the market equilibrium described by interest rate parity (IRP).

 
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