1. The rates of inflation are 23% and 4% in Argentina and Canada respectively. What implications does this have for the Canadian dollar / Argentina peso (C$/peso) exchange rate if the current spot rate is 0.2678 C$/peso?

2. The interest rates in Hungary (Forint) and Sweden (Krona) are 9% and 3% respectively and the rates of inflation are 6.5% and 1.5% respectively. The spot rate is 29.45 Forint/Krona and the 1-year forward rate is 31.15. Is there an arbitrage opportunity? If so, how would you take advantage of it?

3. Describe how the spread of a eurobank in Aruba might change if international investors suddenly perceive that the bank is much riskier than before.

has to offer higher deposit rate. Aruba will have to offer lower interest rate on a loan