5. Spot rate of pound $1.60 90-day forward rate $1.5385 90-day US interest rate 2% 90-day UK interest rate 4% a. According to the interest rate parity, what 90-day forward rate of pound should be? I b. What is the net profit from the proper covered interest arbitrage, if you have 10,000 ($ or pound) to invest? c. Which interest rate will go up after the covered interest arbitrage, given the CIA is feasible for foreign investors? d. Which one, forward rate or spot rate, will go up after the covered interest arbitrage, given the CIA is feasible for foreign investors? 6. Fundamental forecasting: Regression model: BPt = b0 + b1 INFt-1 + b2 INCt +ut Regression Coefficients Estimates bo 0.002 61 0.8 b2 1.0 Inflation in the last period, INFt-1, is 4%. The income change in current period, INCt, can be estimated from the following: Probability Possible changes in INCE 20% 1.5% 50% 2% 30% 2.2% a. What is the expected income differential (INCH)? b. What is the expected change in BP in period t? 7. Long-term forecasting Annual interest rate for 5 years U.S. 10% U.K. 13% Spot rate of BP is $1.50 a. What is the forward premium (discount) if the 5-year forward rate is used as a forecast? b. What is the expected change in BP in 5 years? c. What is the future spot rate of BP in 5 years? 5. Spot rate of pound $1.60 90-day forward rate $1.5385 90-day US interest rate 2% 90-day UK interest rate 4% a. According to the interest rate parity, what 90-day forward rate of pound should be? I b. What is the net profit from the proper covered interest arbitrage, if you have 10,000 ($ or pound) to invest? c. Which interest rate will go up after the covered interest arbitrage, given the CIA is feasible for foreign investors? d. Which one, forward rate or spot rate, will go up after the covered interest arbitrage, given the CIA is feasible for foreign investors? 6. Fundamental forecasting: Regression model: BPt = b0 + b1 INFt-1 + b2 INCt +ut Regression Coefficients Estimates bo 0.002 61 0.8 b2 1.0 Inflation in the last period, INFt-1, is 4%. The income change in current period, INCt, can be estimated from the following: Probability Possible changes in INCE 20% 1.5% 50% 2% 30% 2.2% a. What is the expected income differential (INCH)? b. What is the expected change in BP in period t? 7. Long-term forecasting Annual interest rate for 5 years U.S. 10% U.K. 13% Spot rate of BP is $1.50 a. What is the forward premium (discount) if the 5-year forward rate is used as a forecast? b. What is the expected change in BP in 5 years? c. What is the future spot rate of BP in 5 years