Question
2. Go to the following websites and download the daily exchange rates of the U.S. dollars against one Australian dollar and against one U.K. pound.
2. Go to the following websites and download the daily exchange rates of the U.S. dollars against one Australian dollar and against one U.K. pound.
USD/AUD:https://fred.stlouisfed.org/series/DEXUSAL
USD/British Pound:https://fred.stlouisfed.org/series/DEXUSUK
With these data, answer all of the following questions.
a.What were the exchange rates between the Australian dollars and the UK pound,EAU$/, i.e., Australian dollars per U.K. pound, on 1 June 2018 and 28 November 2018? (round to 4 decimal places)
USD/AUD June 1: 0.7566
Nov 28: 0.7233
USD/Pound: June 1: 1.3358
Nov 28: 1.2766
AUD/Pound: June 1: 0.7566/1.3358 = 0.5664
Nov 28: 0.7233/1.2766 = 0.5666
b.Assume that today is 1 June 2018. Further assume that the 6-month effective interest rates in Australia and the U.K. are 0.75% and 0.25%, respectively.
i.Based on the covered interest parity (CIP), what should be the 180-day forward rate,FAU$/, on 1 June 2018 (the contract matures on 28 November 2018)? Use the exact equation of the CIP.
CIP:
This is then transposed to find the Forward Rate, 28thof November 2018,
F = 0.5664 * (1.75)/(1.25)
F = 0.5664 * 1.4
F = 0.79296
ii.The CIP does not hold at the moment with the 180-day forward rate,FAU$/, of 1.7800.Explain how you can make risk free profits using spot and forward markets in 180 days if you can either borrow AU$1 million Australian dollars from an Australian bank or borrow AU$1 million Australian dollar worth of U.K. pounds from a U.K. bank for 180 days with the interest rates above today. The answer should have the exact amount of profitsin Australian dollars. Do not forget to pay the principal and interests on 28 November 2018.
My question is: Can you please assist with ii. of question 2, I am unsure of how to tackle this or where to start??
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