Q. Interest rates in Hungary are currently 8.25% p.a. and in Europe interest rates are currently offered at 4.5% p.a. Current exchange rates are GBP/HUF 456.66 and EUR/GBP 0.8565

The GBP/HUF one year forward points are 780. The EUR/GBP one year forward points are 124. Note: Points are quoted to the last significant digit in the quotation.

(a) What is the current cross rate for the value of the Euro in terms of Hungarian Forint in the spot market?

(b) Generate a one-year forecast for the value of the Euro in terms of Hungarian Forint using unbiased forward expectations (4 Decimal places)

(c) Generate a three-year forecast for the value of the Euro in terms of Hungarian Forint Lira using the International Fisher Effect. (4 Decimal places) You may assume that the yield curve is flat.

Show all workings.