3. Interest Rate Parity

Use Table 18.2 to answer the following questions. Suppose interest rate parity holds, and the current risk-free rate in the United States is 2.1 percent per six months. What must the six-month risk-free rate be in Australia? In Japan? In Great Britain?

4. Inflation and Exchange Rates

Suppose the current exchange rate for the Polish zloty is Z 3.91. The expected exchange rate in three years is Z 3.98. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rate is constant for both countries. What relationship are you relying on in answering?

5. Exchange Rates and Arbitrage

Suppose the spot and six-month forward rates on the Norwegian krone are NKr 9.14 and NKr 9.27, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate in Norway is 5.7 percent.

a. Is there an arbitrage opportunity here? If so, how would you exploit it?

b. What must the six-month forward rate be to prevent arbitrage?

TABLE 18_2 EXCHNGE RATES: MAY 5, 2021 \begin{tabular}{lrr} \hline \hline Country/Currency & USD Equiv & Currency per USD \\ \hline Americas & & \\ Argentina peso & .0107 & 5.6694 \\ Brazil real & -1868 & 5.35 .43 \\ Canada dollar & .8151 & 1.2269 \\ Chile peso & .001418 & 705.10 \\ Ecuador US dollar & 1 & 1 \\ Mexico peso & .049 .4 & 20.2585 \\ Uruguay peso & .02270 & 4.4 .0450 \end{tabular} Asia-Pacitic Australia dollar 1-mo forward 3-mos forward 6-mos forward China yuan Hong Kong dollar India rupee Indonesia rupiah Japan yen 1-mo forward 3-mos forward 6-mos forward Malaysia ringgit New Zealand dollar Pakistan rupee Philippines peso Singapore dollar South Korea won Taiwan dollar Thailand baht Vietnam dong Europe Czech Rep. koruna Denmark krone Euro area euro Hungary forint Norway krone Poland zloty Romania leu Russia ruble Sweden krona Switzerland franc 1-mo forward 3-mos forward 6-mos forward Turkey lira UK pound I-mo foeward 3-mos forward 6-mos forward Middle East/Africa Bahrain dinar Egypt pound Israel shekel Kuwait dinar Oman sul rial Qatar rial Saudi Arabia riyal South Africa rand \begin{tabular}{|c|c|} \hline .7748 & 1.2907 \\ \hline .7749 & 1.2905 \\ \hline .7751 & 1.2902 \\ \hline .7753 & 1.2898 \\ \hline .1545 & 6.4336 \\ \hline .1287 & 7.7699 \\ \hline .01355 & 33.79165 \\ \hline .0000693 & 14435 \\ \hline .00916 & 109.20 \\ \hline .00914 & 109.42 \\ \hline .00908 & 110.08 \\ \hline 00899 & 111.21 \\ \hline .2429 & 4.1175 \\ \hline .7215 & 1.3860 \\ \hline .00654 & 152.92 \\ \hline .0208 & 48.0270 \\ \hline .7487 & 1.3356 \\ \hline .0008889 & 1124.99 \\ \hline .03576 & 27.97 \\ \hline .03213 & 31.120 \\ \hline .00004336 & 23062 \\ \hline .04655 & 21.484 \\ \hline .1615 & 6.1917 \\ \hline 1.2006 & .8330 \\ \hline .00334459 & 298.99 \\ \hline .1197 & 8.3554 \\ \hline .2725 & 3.6701 \\ \hline .2626 & 3.8084 \\ \hline .01337 & 74.797 \\ \hline .1178 & 8.4862 \\ \hline 1.0952 & .9134 \\ \hline 1.0945 & -9137 \\ \hline 1.0931 & .9145 \\ \hline 1.0909 & -9167 \\ \hline .1202 & 8.3175 \\ \hline 1.3909 & .7190 \\ \hline 1.3910 & .3189 \\ \hline 1.3912 & .3188 \\ \hline 1.3914 & .7187 \\ \hline \end{tabular} \begin{tabular}{rr} 2.65415 & -3768 \\ .0638 & 15.6682 \\ .3062 & 3.2654 \\ 3.3164 & .3015 \\ 2.59757 & .38 \\ .2746 & 3.6410 \\ .2667 & 3.7501 \\ .0696 & 14.3688 \end{tabular}