6. Consider a French investor with 4,000 euros to place in a bank deposit in either the France or Great Britain. The (one-year) interest rate on bank deposits is 1% in Britain and 6% in the France. The (one-year) forward euro-pound exchange rate is 1.45 euros per pound, and the spot rate is 1.2 euros per pound. Answer the following questions, using the exact equations for uncovered interest parity (UIP) and covered interest parity (CIP) as necessary. (a) What is the euro-denominated return on French deposits for this investor? (i.e. how many Euro will she have by the end of the year) (b) What is the (riskless) euro-denominated return on British deposits for this investor using forward cover? (c) Is there an arbitrage opportunity here? Explain why or why not. Is this an equilibrium in the forward exchange rate market? (d) If the spot rate is 1.2 euros per pound, and interest rates are as stated previously, what is the equilibrium forward rate, according to CIP? (e) Suppose the forward rate takes the value given by your answer to (d). Compute the forward premium on the British pound for the French investor (the ratio between the forward rate and the spot rate less 1, where exchange rates are quoted in euros per pound). Is it positive or negative? Why do investors require this premium/discount in equilibrium? (f) Based on your answer to (e), what is the expected euro-pound exchange rate one year ahead? (to answer this question, combine CIP and UIP). 7. Suppose that New Zealand's annual interest rate is higher than Japan's annual interest rate. (a) According to uncovered interest parity (UIP), should we expect the NZ dollar to appreciate or depreciate against the Yen during this time period? Explain your answer. (b) In practice, based on the data discussed in class, we have seen systematic vio- lations from UIP, which motivates carry-trade strategy by investors. Do these deviations from UIP imply there are arbitrage opportunities (i.e. low risk profits to be made) in the foreign exchange rate market?