$1.$ Suppose you want to infer expected future exchange rates in a lessdeveloped country that has free$-$market$-$determined interest rates but

does not have a forward exchange market. Is there any other way of

inferring expected future exchange rates? Under what assumptions?

$2.$ a$.$ Show that there is a direct relationship between the forward premium

and the $$real$$ interest rate differential between two currencies.

b$.$ Under what conditions will the forward premium equal the

expected $$inflation$$ differential between two currencies?

$3.$ Give four reasons why, when interest parity does not hold exactly, we

are unable to take advantage of arbitrage to earn profits.

$4.$ Suppose the one$-$year interest rate on British pounds is $11$ percent,

the dollar interest rate is $6$ percent, and the current $$/$d spot rate is

$$1\mathrm{.}80.$

a$.$ What do you expect the spot rate to be in one year?

b$.$ Why can we not observe the expected future spot rate?

$5.$ Assume that the one$-$year interest rate in the U$.$S$.$ is $2\%$ and the oneyear interest rate in Sweden is $4\%.$ Is there a premium or discount on

the Swedish krona?

$6.$ If two countries had identical term structures of interest rates, what is

the expected future exchange rate change between the two

currencies?