Need help with a currency swap for a finance class.

FINA 6214 International Financial Markets Group Name: __________________________________________________________________ Problem Set 1 (1 point for each sub-question), due on Monday August 29 TURN IN ONE PDF FILE PER TEAM, PLUS ONE EXCEL FILE FOR QUESTIONS 4-6. Unless specified, the quotes are in \"trader convention,\" i.e. EUR/USD refers to the number of USD per EUR 1. (1) Use the exchange rate table below to answer the questions. All rates are against USD. USD is CCY2 for GBP and EUR but is CCY1 for all other currencies. a. What are the closing bid and offer rates for USD/NOK? ANSWER: Bid ________ Offer ________ (in terms of number of NOK per USD 1) b. Did USD appreciate or depreciate against EUR on October 10? ANSWER: ________________ c. As a customer, which rate would you get if you were to convert CHF to USD? ANSWER: ________________ d. What is the 3-month forward USD/TRL rate? ANSWER: ________________ (in terms of number of TRL per USD 1) (2) Suppose the 6-month (annualized) interest rates are 0.50% for USD and 1.50% for EUR. The current spot rate is USD 1.3000/ EUR. For simplicity, assume that for 6 months, you earn half of the annualized interest rates. a. What is the arbitrage-free 6-month forward EUR/USD? ANSWER: ______________ (in terms of number of USD per EUR 1) 1 FINA 6214 International Financial Markets b. If the 6-month forward rate is 1.3000 as opposed to the rate in (a), describe briefly the transactions you need to make to earn arbitrage profits? ANSWER: ________________________________________________________ (3) The USD/BRL spot rate is 2.40. The gasoline prices (per gallon) are BRL 9.00 in Brazil and USD 3.00 in the U.S. a. According to PPP, is BRL overvalued or undervalued relative to USD? Recall that the same good is more (less) expensive in the country with overvalued (undervalued) currency. ANSWER: _______________ b. Speculate: Why might this deviation from PPP (based on gasoline prices) persist? ANSWER: ________________________________________________________ __________________________________________________________________ ** Please use the data and setups in the excel file: \"Problem Set 1.xlsx\" to answer questions (4) - (6). Each sheet in the file corresponds to the question of the same number. ** (4) UIRP is overwhelmingly rejected in the data. On average, high-interest rate currencies do not depreciate as much against lower-interest rate currencies as predicted by UIRP. In the long exercise below, we will try to take advantage of this violation. Go to sheet \"Question 4\". Here, I am asking you to implement \"carry trades\