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Spot (USD/EUR) 3-m Forward (USD/EUR) Interest rate USD (p.a.) Interest rate EU (p.a.) These prices account for the presence of transaction costs in both foreign exchange markets (bid and ask rates) and money markets (borrowing and lending rates) 1.09380 1.09400 1.09385 1.09415 1.00% 3.00% 2.00% 4.00% a) Is there an arbitrage opportunity in these quotes? b) If you had to borrow USD 100, where would you borrow? Why? c) If you had to invest USD 100, where would you invest? Why? d) Assume that you require EUR 5000 in three months, what is the smallest amount of USD that you need to put aside today? e) Your great aunt promises to give you EUR 5000 in three months. What is the maximum amount of USD that you can get today? Question 2. You are a Canadian investor. You face the following prices: Spot (CAD/GBP). Canadian Interest Rate (p.a.) UK Interest Rate (p.a.) 2.01502 4% 2% a) Compute the 3-month forward rate for the Pound that is consistent with covered interest parity b) Compute the 3-month forward premium on the Pound in annual percentages c) Assume instead that the three months forward rate for the Pound is CAD 2.02002/GBP. Is there an arbitrage opportunity? If so, how much arbitrage profits can you make today (per CAD invested)? d) Assume that you face a 20 percent interest income tax for all investment in England, but only a 10 percent interest income tax for all investment in Canada. Compute the 3-month forward rate for the Pound that is consistent with covered interest parity Question 1. Complete the following exchange rate table. CAD USD EGBP EUR AUD 0.91416 1 0.69648 1 0.71255 1 1.00588 1 1 Spot (USD/EUR) 3-m Forward (USD/EUR) Interest rate USD (p.a.) Interest rate EU (p.a.) These prices account for the presence of transaction costs in both foreign exchange markets (bid and ask rates) and money markets (borrowing and lending rates) 1.09380 1.09400 1.09385 1.09415 1.00% 3.00% 2.00% 4.00% a) Is there an arbitrage opportunity in these quotes? b) If you had to borrow USD 100, where would you borrow? Why? c) If you had to invest USD 100, where would you invest? Why? d) Assume that you require EUR 5000 in three months, what is the smallest amount of USD that you need to put aside today? e) Your great aunt promises to give you EUR 5000 in three months. What is the maximum amount of USD that you can get today? Question 2. You are a Canadian investor. You face the following prices: Spot (CAD/GBP). Canadian Interest Rate (p.a.) UK Interest Rate (p.a.) 2.01502 4% 2% a) Compute the 3-month forward rate for the Pound that is consistent with covered interest parity b) Compute the 3-month forward premium on the Pound in annual percentages c) Assume instead that the three months forward rate for the Pound is CAD 2.02002/GBP. Is there an arbitrage opportunity? If so, how much arbitrage profits can you make today (per CAD invested)? d) Assume that you face a 20 percent interest income tax for all investment in England, but only a 10 percent interest income tax for all investment in Canada. Compute the 3-month forward rate for the Pound that is consistent with covered interest parity Question 1. Complete the following exchange rate table. CAD USD EGBP EUR AUD 0.91416 1 0.69648 1 0.71255 1 1.00588 1 1

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