1.Grace Moogzt is a foreign exchange dealer with Standard Bank. She notices the following quotes:

Spot exchange rate R12.5123/US$

One year forward exchange rate R12.3214/US$

One year USD interest rate 8.5%p.a.

One year Rand interest rate 11.5%p.a.

a. Is the interest rate parity holding? You may ignore transaction costs.

b. Show that an arbitrage opportunity exists

c. Calculate the arbitrage profit that can be made assuming that Grace Moogzt is authorised to work with US$2 000 000 or the Rand equivalent. Show all the steps that need to be taken to make arbitrage profit.

2. A call option allows the holder to buy US$200 000 at an exercise exchange rate of 1.6000 (AUD/USD). If the premium paid is 5 Australian cents for each USD, calculate the net payoff at the following spot exchange rates:

(1) 1.7240

(2) 1.8150

(3) 1.5365

(4) At what exchange rate will the holder break even