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2. (Ch. 7) Locational Arbitrage. Assume the following information: There are two banks, Bank N and Bank S, side by side and quote the bid

2. (Ch. 7) Locational Arbitrage. Assume the following information: There are two banks, Bank N and Bank S, side by side and quote the bid and ask spot exchange rates of AUDUSD as follows. Bank N: 0.61 / 0.63 Bank S: 0.62 / 0.64 Is the locational arbitrage possible in this case from a customers perspective? (2 points) Why? (6 points) 3. (Ch. 7) Covered Interest Arbitrage. Assume the following information: St = 1.0700 in EURUSD Ft,90 = 1.0730 in EURUSD iEUR = 3.60% iUSD = 5.20% (both interest rates are annualized) T = 90 days Given this information, is covered interest arbitrage possible? (6 points) Design a covered arbitrage strategy and calculate its profits. (12 points) 4 (Ch. 7) Covered Interest Arbitrage. Assume the following information: (GBP means the Great British pound, and MXN means the Mexican peso.) St = 26 GBPMXN Ft,180 = 27 GBPMXN iGBP = 1% iMXN = 5% (both interest rates are annualized) T = 180 days Given this information, is covered interest arbitrage possible? (5 points) Design a covered 5. (Ch. 8) Interpreting Inflationary Expectations. If investors in the United States and Mexico require the same real interest rate, and the nominal rate of interest is 5 percent higher in Mexico, what does this imply about expectations of U.S. inflation and Mexican inflation? What do these inflationary expectations suggest about future exchange rates? (5 points)

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