5. Draw a figure like Figure 6.4 to show what interest arbitrage will do to interest-rate differentials and the forward premiums at points A to F in the table below. If all the adjustment to the interest parity occurs in the forward exchange rate, what will F1—

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($/£) be after interest parity has been restored?

Transcribed Image Text:

A B C D E F S($/) 1.6200 1.6200 1.6200 1.6200 1.6200 1.6200 F ($/) 1.6220 1.6150 1.6220 1.6150 1.6180 1.6120 (one month), % 8.00 8.00 8.00 8.00 8.00 8.00 r (one month), % 10.00 9.00 8.00 7.00 6.00 5.00