a) Nominal one year interest rates in South Africa and Australia are 6.75% and 2.9% respectively. The current AUD ZAR spot rate is 10.0314. You think that purchasing power parity holds and the one year real interest rate in South Africa is 1.75% and 1% in Australia. What would your expected spot rate for AUD ZAR be? (5 marks)

b) One year interest rates in Australia and Papua New Guinea are 2.9% and 6.25% respectively. Todays spot rate is AUD PGK 2.3027. If we assume that the international Fisher effect holds, what would you expect the AUD PGK spot rate to be in one year? (5 marks)