8. In February 1994, Argentina's currency board was in place, and 1 peso was exchangeable into 1 dollar. The following interest rates were available: Dollar interest rate in Argentina on 90-day deposits: 5.75% p.a. Peso 90-day deposit rate in Argentina: 7.50% p.a. U.S. 90-day LIBOR: 1.75% p.a. (a) What risk does the difference between the 5.75% dollar interest and 1.75% LIBOR reflect? (1.5 marks) (b) What risk does the difference between the rate on 90-day peso and 90-day dollar deposits by Argentine banks reflect? (1.5 marks) (c) Assume that if the peso were to be devalued, investors believe it would lose 25% of its current value. Compute the probability that the peso will be devalued. (Assume that default and devaluation are independent events.) (7 marks) 8. In February 1994, Argentina's currency board was in place, and 1 peso was exchangeable into 1 dollar. The following interest rates were available: Dollar interest rate in Argentina on 90-day deposits: 5.75% p.a. Peso 90-day deposit rate in Argentina: 7.50% p.a. U.S. 90-day LIBOR: 1.75% p.a. (a) What risk does the difference between the 5.75% dollar interest and 1.75% LIBOR reflect? (1.5 marks) (b) What risk does the difference between the rate on 90-day peso and 90-day dollar deposits by Argentine banks reflect? (1.5 marks) (c) Assume that if the peso were to be devalued, investors believe it would lose 25% of its current value. Compute the probability that the peso will be devalued. (Assume that default and devaluation are independent events.) (7 marks)