1. If the current spot exchange rate is $0.40/yuan, the current 30-day forward exchange rate is $0.45/yuan, the annualized interest rate on 30 day dollar denominated bonds is 12% (1% per 30 days) and the annualized interest rate on 30-day Chinese yuan-denominated bonds is 9% (0.75% per 30 days):

Is the yuan at a forward premium or discount?

2. In this problem, begin with dollars and end up with dollars. If you have the following spot exchange rates:

$0.32/rand

$1.32/DM

4 rand/DM

a. How would you engage in arbitrage to profit from these three rates (explanation)?

b. What is the possible profit for each dollar used initially?

c. What must the value of the cross-rate be to eliminate these profits?