Please Answer.

Investing interest rates in Thailand are $2\mathrm{.}5\%$ p$.$a$.$ and in Hungary they are currently at $8\mathrm{.}25\%$ p$.$a$.$ The

THB$/$HUF spot rate is $10\mathrm{.}02$

$($a$)$ Assume no transaction costs. Calculate the theoretical three$-$year forward rate of the THB implied

by Interest Rate Parity.

$($b$)$ Now assume the actual three$-$year forward rate is THB$/$HUF $11\mathrm{.}41.$ What, if any, is the percentage

return from engaging in Covered Interest Arbitrage? Assume a transaction cost of $0\mathrm{.}2\%$ in the spot

and the forward market. Also assume that borrowing rates are $0\mathrm{.}75\%$ higher than the investing rates in

both countries.

Your answer will be either $($choose the appropriate one$)$:

A$.$ Arbitrage: Calculate the result as a percentage of your initial borrowing, accurate to $4$

decimal places, making sure to include any opportunity costs in your calculations$).$

B$.$ No arbitrage: If there is no arbitrage available then show how you are unable to make money

through a covered interest arbitrage process.