1. Assume the following information for Australia and the United States of America where AUD represents Australian dollar and USD represents US dollar.

	AUSTRALIA	UNITED STATES
Nominal Interest rate	1.50%	0.78%
Expected Inflation	1.30%	1.60%
Spot rate		1AUD = 0.7536 USD
One-year forward rate		1AUD = 0.7482 USD

1. Does IRP hold? Justify your answer with any appropriate calculations and explain in no more than 1-2 sentences (60 words maximum).

2. According to the International Fischer Effect (IFE), what is the expected spot rate of the AUD in one-year?

1. A US company will need 1 million Polish zloty in 2 years to purchase imports. This company uses forward contracts to hedge its payables. Under the following assumptions, how many dollars will the company need in 2 years? Assume that interest rate parity holds, the spot rate of the Polish Zloty is $0.30, and the 2 year annualised interest rate in the US is 5 per cent whereas the 2 year annualised interest rate in Poland is 11 per cent.

2. The US inflation rate is expected to be 5.4% over the next year and the Australian inflation is expected to be 2.1% over the next year. The existing spot rate of the Australian dollar is $0.74. According to PPP, the Australian dollars exchange rate is forecast to change to: