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1) Triangular Arbitrage: The exchange rate for the US and Canada is currently quoted at 0.993 - 0.995 $/Cdn $. The exchange rate between the US and the Mexican peso is quoted at 0.0832 -0.0835 $/peso. What peso/Cdn$ exchange rates do not allow arbitrage? 2) UIP: The current US/Mexican exchange rates are 0.0832 -0.0835 $/peso. Assume 2- year interest rates in the US allow you to invest at annual rates of 1% or borrow at 1.5%. Assume 2-year interest rates in Mexico allow you to invest at annual rates of 4.5% or borrow at 5%. Given uncovered interest parity, what is the range of expected exchange rates in 2 years? 3) CIP: You are told that the current exchange rate on the Russian rouble is .0336 - .0338 $/rouble on the spot market. An investment bank quotes you a rate of .0310 - 0316 $/rouble for a 12-month forward exchange contract. Assume that the 12-month investment and borrowing rates in the US are 1% and 1.5% (annual) respectively. What range of risk-free rates in Russia do not allow arbitrage? 4) a) A candidate running for office says, "America will no longer be able to export because we are going to lose our competitive edge in every good!" Is this possible? Discuss briefly. b) If 7-year rates in the US are 3.4%, and 7-year rates in Japan are 1.2%, and the current exchange rate is 82.5 Yen/$, what exchange rate would you expect in 7-years? 1) Triangular Arbitrage: The exchange rate for the US and Canada is currently quoted at 0.993 - 0.995 $/Cdn $. The exchange rate between the US and the Mexican peso is quoted at 0.0832 -0.0835 $/peso. What peso/Cdn$ exchange rates do not allow arbitrage? 2) UIP: The current US/Mexican exchange rates are 0.0832 -0.0835 $/peso. Assume 2- year interest rates in the US allow you to invest at annual rates of 1% or borrow at 1.5%. Assume 2-year interest rates in Mexico allow you to invest at annual rates of 4.5% or borrow at 5%. Given uncovered interest parity, what is the range of expected exchange rates in 2 years? 3) CIP: You are told that the current exchange rate on the Russian rouble is .0336 - .0338 $/rouble on the spot market. An investment bank quotes you a rate of .0310 - 0316 $/rouble for a 12-month forward exchange contract. Assume that the 12-month investment and borrowing rates in the US are 1% and 1.5% (annual) respectively. What range of risk-free rates in Russia do not allow arbitrage? 4) a) A candidate running for office says, "America will no longer be able to export because we are going to lose our competitive edge in every good!" Is this possible? Discuss briefly. b) If 7-year rates in the US are 3.4%, and 7-year rates in Japan are 1.2%, and the current exchange rate is 82.5 Yen/$, what exchange rate would you expect in 7-years
