1.You are given the following information:

Spot exchange rate (AUD/CHF) 1.2500

Three month forward rate (AUD/CHF) 1.2585

Australian three month interest rate 10.5% p.a.

Swiss three month interest rate 7.5% p.a.

(a) Is there any 'qualitative' violation of Covered Interest Parity (CIP)? Briefly explain.

(2 marks)

(b) Calculate the covered margin (going short on the CHF). Is there a quantitative violation of CIP? (2 marks)

(c) Calculate the interest parity forward rate and compare it with the actual forward rate.

(2 marks)

(d) Calculate the forward spread and compare it with the interest differential. (3 marks)

(e) What would an arbitragers do? (2 marks)