2. Answer the following questions about the IRP: (a) Suppose the 5-year interest rate on a dollar-denominated pure dis- count bond is 4.5% p.a. and the interest rate on a similar pure discount euro-denominated bond is 7.5% p.a. If the current spot rate is $1.08/, what forward exchange rate prevents covered interest ar- bitrage? (b) If the 30-day yen interest rate is 3% p.a., and the 30-day euro interest rate is 5% p.a. What is the magnitude of the forward premium or discount on the yen? (c) Suppose the spot rate is CHF1.4706/$, and the 180-day forward rate is CHF1.4295/$. If the 180-day dollar interest rate is 7% p.a., what is the annualized 180-day interest rate on Swiss francs that would prevent arbitrage?

3. Carla Heinz is a portfolio manager for Deutsche Bank. She is considering two alternative investments of EUR10,000,000: 180-day euro deposits or 180-day Swiss franc (CHF) deposits. She has decided not to bear trans- action foreign exchange risk. Suppose she has the following data: 180-day CHF interest rate of 8% p.a.; 180-day EUR interest rate of 10% p.a.; spot rate of EUR1.1960/CHF; 180-day forward rate of EUR1.2024/CHF. Which of these deposits provides the higher euro return in 180 days? If these were actually market prices, what would you expect to happen?

2. Answer the following questions about the IRP: (a) Suppose the 5-year interest rate on a dollar-denominated pure discount bond is 4.5% p.a. and the interest rate on a similar pure discount euro-denominated bond is 7.5% p.a. If the current spot rate is $1.08/, what forward exchange rate prevents covered interest arbitrage? (b) If the 30 -day yen interest rate is 3% p.a., and the 30 -day euro interest rate is 5% p.a. What is the magnitude of the forward premium or discount on the yen? (c) Suppose the spot rate is CHF1.4706/\$, and the 180-day forward rate is CHF1.4295/S. If the 180-day dollar interest rate is 7% p.a., what is the annualized 180-day interest ratejon Swiss francs that would prevent arbitrage? 3. Carla Heinz is a portfolio manager for Deutsche Bank. She is considering two alternative investments of EUR10,000,000: 180-day euro deposits or 180-day Swiss franc (CHF) deposits. She has decided not to bear transaction foreign exchange risk. Suppose she has the following data: - 180-day CHF interest rate of 8% p.a.; - 180-day EUR interest rate of 10% p.a.; - spot rate of EUR1.1960/CHF; - 180-day forward rate of EUR1.2024/CHF. Which of these deposits provides the higher euro return in 180 days? If