a) According to Interest Rate Parity, if the Interest rate is 6% in Italy what would we expect to see to happen to the value of the Euro relative to AUD? (Choose the most appropriate answer.) (1 Mark)

Answer: AnswerAPPRECIATEDEPRECIATEINDETERMINABLE

b) If the spot rate for AUD/USD is 0.99 and the annual interest rate is 4% in Australia and 6% in the USA what is the fair price to pay for a 4-month (120 day) AUD/USD Forward contract purchased today? (2 Marks) Answer as a decimal to 4 decimal places.

Answer: AnswerAUD/USD

c) If the spot rate for CAD/AUD is 0.9 and the annual interest rate is 4% in Canada and 3% in Australia is there an arbitrage opportunity if the 12-month (360 day) CAD/AUD Forward contract price quoted today is 0.9078? (Choose the most appropriate answer.) (1 Mark)

Answer: AnswerYESNOINDETERMINEABLE

d) According to Purchasing Power Parity, if inflation increases in one country and decreases in another, we expect the exchange rate of the first country to: (Choose the most appropriate answer.) (1 Mark)

Answer: AnswerAPPRECIATEDEPRECIATEINDETERMINEABLE