3.

a. Use the data in Question 2 and the precise formula on the right-hand side of equation (6.4) to compute the covered yield on investment in pounds. Repeat this using the approximate formula on the right-hand side of equation (6.5).

b. Compare the error between the precise formula and the approximate formula in a above with the error in the situation where r$ = 15 percent, r£ = 16 percent, and S($/£) and F3($/£) are as above.

c. Should we be more careful to avoid the use of the “interest plus premium or minus discount” approximation in equation (6.5) at higher or at lower interest rates?

d. If the interest rates and the forward rate in Question 2 are for twelve months, is the difference between equation (6.4) and equation (6.5) greater than when we are dealing with three-month rates?