(a) Suppose you expect the Croatian currency, the Kuna, to appreciate 5% relative to the USD over the next 6 months. What additional information would you need in order to decide whether it is a good time to buy Kuna? Suppose you find out in the newspapers that the interest rate on Kuna deposits is 7%. What is the expected dollar return on Kuna deposits? What must the US interest rate be if the uncovered interest parity condition holds? (b) You are a foreign exchange trader specialized in the US dollar Swiss franc market (USD/CHF). One morning, you notice that the one-year dollar interest rate is 4%, while the one-year interest rate on Swiss francs is 2.7%. Todays USD/CHF rate is $1.7. What spot rate do you expect for the USD/CHF in one year? (c) You are considering a contract with a Korean distributor. Under this contract you receive 100 millions won in one year. Suppose the spot rate is 990 won/$, the one-year forward rate on the won is 1010 won/$, the US annual interest rate is 3.5% and the Korean annual interest rate is 4.5%. Further, suppose another potential Korean partner offers to pay you $95,000 one year from now (note that this amount is payable in dollars rather than won). Which contract is more profitable for you? Is the interest rate parity condition satisfied in this problem? If there is arbitrage opportunity, can you think of a strategy that you make the most from it?