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3. Suppose that the treasurer of IBM can borrow $100,000,000 or its gbp equivalent, and observes the following quotes: the 120-days interest rate is 8
3. Suppose that the treasurer of IBM can borrow $100,000,000 or its gbp
equivalent, and observes the following quotes: the 120-days interest rate is 8
percent per annum in the United States and 6 percent per annum in United Kingdom. Currently, the spot exchange rate is $1.20 per gbp and the 120-days forward exchange rate is $1.30 per gbp. Treasurer calculates possible future Spot exchange rate (in 120 days) considering PPP with expected inflation rates of 4 percent per annum in the United States and 2 percent per annum in United Kingdom. Calculate (if exists) Covered Interest Arbitrage and Uncovered Interest
Arbitrage. Explain differences between CIA and UIA.
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