$1.$ According to covered interest rate parity, you can compute the equilibrium forward rate premium$/$discount using

the interest rate differentials. Specifically, the equilibrium premium$/$discount can be stated as:

$[($ F$$S$0)$

S$0]$ x $100\%=[(1+$i$ $)$

$(1+$if $)1]$ x $100\%$

Assume the current spot rate is $$1\mathrm{.}1300/,$ the actual $6-$moth forward rate is $$1\mathrm{.}0900/,$ and the $6-$month U$.$S$.$ rate

is $5\%$ per annum with the $6-$month France rate at $8\%$ per annum. Remember that you need to use the interest rates

on a per $6-$month basis.

a$)$ Compute the actual forward premium$/$discount on the $$ using the actual exchange rates. Hint: substitute the

actual Forward rate for F$*$ in the left$-$hand side of the equation.

b$)$ Compute the implied equilibrium forward premium$/$discount using IRP. You will first need to compute F$*$

using the equilibrium formula given as: or F$=$S $[1+$i$

$1+$i$]$

c$)$ Based on your answers to parts a and b$,$ is the euro at too much of a premium or discount? Given your

answer, how could you take advantage of this situation using covered IRP? Just explain, no calculation

required.