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Assume the following market quotes information, where the interest rates are quoted in annualized forms and have terms of 270 days: (You are the bank's
Assume the following market quotes information, where the interest rates are quoted in annualized forms and have terms of 270 days: (You are the bank's customer, and the GBP represents the British pound.) S:(GBPUSD) = 1.3300 (current spot exchange rate in GBPUSD) F1.270(GBPUSD) = 1.3212 / 1.3220 (270-day forward exchange rate in GBPUSD, quoted as of now) iGBP = 1.00% (annualized 270-day nominal interest rate in GBP) iusD = 0.60% (annualized 270-day nominal interest rate in USD) T = 270 days Questions: a. Given this market quotes information, is covered interest arbitrage possible? (1 point) Why? (2 points) b. Design a covered arbitrage strategy and calculate its profits. (5 points) c. Assume the annualized real interest rates asked by the residences in these two countries are the same at 0.32%. What are the annualized expected inflation rates in these two countries, respectively? (2 points) d. Continuing from c, if you believe relative purchasing power parity (PPP) is true, what is the expected spot exchange rate for GBPUSD after 270 days? (2 points) e. Based on covered interest rate parity (IRP), what is your expectation for the exchange rate in 270 days? (2 points) f. If you believe the international Fisher effect (IFE) is true, what is your expectation for the exchange rate after 270 days? (2 points) g. List at least two differences between parts e and f. (4 points)
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