1.Rebecca is a UK citizen, she is resident in London. Skyla is a South African citizen, she is resident in Cape Town. Skyla wishes to invest in UK bonds, denominated in British Pound. Rebecca has an opportunity to invest in the same bonds. Both individuals have access to the same set information regarding the bond as outlined in below.

Price of Bond 100

Current Yield 6.5%

Yield in 1year 30 basis points higher

Bond duration 8 years

The risk free rate in South Africa is currently 3,5% and the corresponding rate in the UK is 1,5%

Assume that investment's performance is based on itsrisk premium. Prove thatSkyla'shedged return and the return that Rebecca receives on her investment will be the same if we assume that the foreign exchange market is efficient i.e.interest parity holds.

2.Suppose that Roxanne is looking at investing in US bonds. The interest rate on a risk free bond in the United States of America is currently 2,15%. The equivalent rate on a South African risk free bonds is 4,75% The current ZAR:USD rate is 0,0584.Roxanne expects that the spot rate in 1 year from now will be 0,0606.

2.1.Based on the information provided, calculate the currency risk premium that Roxanne could expect from her investment. . (Hint:Your default should be to use the DC:FC format of your exchange rate quotation)

2.2.Assume that the ZAR appreciates as expected by Roxanne, what would be her domestic currency return on her US bond if she invested for 1 year?

2.3.If IRP held, at what would the ZAR:USD have traded within 1 year? Show calculations.

3.Whilst reviewing some data on her trading platform, Jinendra finds out that the spot USD:ZAR rate is R16.6270 to the USD and that the current 1 year forward rate is R16.5580 to the USD. She also learns that the 12 month interest rate in the USA is 4.0% whilst the same rate in South Africa stands at 2.5%. Her preliminary analysis shows that an arbitrage opportunity exists and based on this analysis, she learns that she should be borrowing in the US market and Lending in the SA Market. However, before she commits to this transaction she wishes to do further analysis to understand how much profit she could make.

If Jenindra decides to invest USD500 000, how much profit would she stand to make from the arbitrage transaction? Show all relevant working.