3 You are given the following information: Spot exchange rate (AUD/EUR) One-year forward rate (AUD/EUR) One-year interest rate on the Australian dollar One-year interest rate on the euro 1.60 1.62 8.5% 6.5% (a) Calculate the forward premium and interest differential to show whether there is any violation of CIP? 5 (b) Explain the rule of thumb to make covered arbitrage profit. What strategy should apply so that you can make profit on covered arbitrage? 10 (c) Calculate the interest parity forward rate (AUD/Euro) and compare it with the actual forward rate (AUD/Euro). Calculate interest parity and actual forward rates in euro per one Australian dollar. 5 (d) If arbitrage is initiated, suggest some values for the interest and exchange rates after it has stopped and equilibrium has been reached. 10