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a. Currently, one Dystopian Dinar (DD) is exchanged for $4, while annual interest rates for both Dystopia and the USA equal 4.7%. However, political instability in Dystopia leads to huge capital outflows to the USA. As a result, the countrys monetary authorities expect an annual depreciation of the DD vis--vis the $ by 9.6%. Assuming that Dystopias Central Banker can control the market interest rate, how she/he will react in order to stabilize the spot exchange rate?

As the owner of the Hot Sun Hotel in Glasgow, you travel to the USA for buying 20 SUVs from Chrysler, for servicing your hotel customers. The total cost of the SUVs is $600,000 and this amount is payable in 12 months. You have sufficient cash at your bank in London, which pays 0.45% interest rate for 3 months compounding every 3 months, to pay for the SUVs. Currently, the spot exchange rate is $ = 0.73, while the 12-month forward exchange rate is $ = 0.76. Also in New York, the money market interest rate is 2% for a 12-month investment. Your alternatives are: (i) keep your money in the UK and buy $600,000 forward, or (ii) buy a certain amount of $ today in the spot market and invest them in the USA for 12 months so that the maturity value becomes equal to $600,000. Which alternative method would you prefer? Explain your answer. [

.Assume that the bilateral spot exchange rate between the and the $ is $ = 0.82, the Eurozones annual interest rate is 4%, and the annual forward exchange rate is $ = 0.84. i. Find the current US interest rate that satisfies the covered interest-rate parity [Mark: 0.5]. ii. Suppose that the annual US interest rate is the one you found in (i) and the Eurozone introduces a tax = 7.5% on capital gains from investing abroad (e.g., on foreign bonds, deposits abroad, etc.). Find the new annual forward exchange rate $ that satisfies the covered interest-rate parity on an after-tax basis

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