[ORDER SOLUTION] Foreign Interest Rate

Forward Rate (interest parity):spot rate*(1 + foreign interest rate) / (1 + domestic interest rate)Forward Rate (Interest Parity) = 1 * (1+0.01) / (1 + 0.03)= 1 * (1.01/1.03)= 0.9806 FrancCurrent Forward Rate = 0.96 Franc= ($1,000,000 / 0.96) – ($1,000,000 / 0.9806)= $1,041,666.67 – $1,019,783.81Total Arbitrage Profit = $21,882.86Question: Expound on interest parity theory in the aforementioned context. Is the above situation sustainable?Future Spot Rate:Spot rate at current * ((1 + US Inflation Rate) / (1 + British Inflation Rate))Future Spot Rate = 2 * ((1 + 0.01) / (1 + 0.04))= 1.94231 Pound = $1.9432Question: What is the meaning of the above in the context of PPP?New Exchange Rate:= 10 + ((1 + Foreign Currency Interest Rate) / (1 + Domestic Currency Interest Rate))= 10 + ((1 + 0.07) / (1 + 0.05))= 10 + 1.019=10.19 Pesos per DollarQuestion: Explain the concept of IFE with the a for mentioned problem.