13. Study Questions #13. Ch 11. Suppose the interest rate (on an annual basis) on three-month Treasury bills is 10% in London and 6% in New York, and the spot rate of the pound is $2.01. How can a U. S. investor profit from uncovered interest arbitrage? Purchase pounds at $2.01 in New York to buy U. K. Treasury bills in London, thus earning 0.5% per year. Purchase pounds at $2.01 in New York to buy U. K. Treasury bills in London, thus earning 2% per year. Purchase pounds at $2.01 in New York to buy U. K. Treasury bills in London, thus earning 4% per quarter. Purchase pounds at $2.01 in New York to buy U. K. Treasury bills in London, thus earning 4% per year. Suppose that the price of the three-month forward pound is $1.96. Will a U. S. investor benefit from covered interest arbitrage? (Hint: The three-month U. K. interest rate is 10%4=2.5% , and the three-month U. S. interest rate is 6%4=1.5% .) No, because there will be a loss of 2%. Yes, the investor will benefit by 1%. No, because there will be a loss of 1%. No, because there will be a loss of 4%.