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I got the answers. Can someone explain it? (a)Considering the following quotes for Canadian Dollars (HKD) and Australian Dollars (AUD) Assumptions Spot exchange rate (CAD/AUD)

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I got the answers. Can someone explain it?

(a)Considering the following quotes for Canadian Dollars (HKD) and Australian Dollars (AUD) Assumptions Spot exchange rate (CAD/AUD) 6 month forward rate (CAD/AUD) Australian Dollar interest rate p.a Canadian Dollar interest rate p.a Value 0.91 0.95 0.5% 1.5% Required: (0) Based on a no arbitrage position, what should the forward rate be in 6 months if the Interest Rate Parity Holds? (3 marks) 1.0075 F = 0.91 x 1.0025 = 0.9145 (ii) If the above rates were offered should you be best to initially borrow AUD or CAD to make an arbitrage profit? Circle your choice below (2 marks) CAD AUD In one sentence, describe what is meant by uncovered interest arbitrage (3 marks) The forward rate is not locked in (iv) If the AUD/USD exchange rate is 0.9 and the AUD/NZD exchange rate is 1.25, What is the price in USD of a stereo that costs $1345 in NZD. (2 Marks) AUD = 0.9 USD AUD NZD = 1.25 - = 0.72 NZD AUD AUD NZD X USD AUD 0.9 1.25 1,345 0.72 $1,868.06 NZD

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