Q1 (a) If the long-term prospects for inflation in the United Kingdom and Australia are 2% and 6% p.a., respectively, the current rate /A$2.68. The current 3-month interest rates are 6% for sterling and 8% for Australian dollars what changes would you expect to observe in the following rates over the next 12 months:

(i) sterling/A$ rate ? (ii) 3-month interest rates UK and Australian? Explain your results.

Q2 Suppose that on 1 January 2020 the spot rate is 1to $1.90 and the UK and the US interest rates are 6% and 4% per annum, respectively, what would we expect the 1-year forward rate to be?

Q3 March A dealer working for a major commercial bank which deals in international currencies finds the following quotations for US dollars to Swiss francs:

Spot $0.8313/SF1

Six months forward $0.8447/SF1

The annualised 6-month dollar interest rate is 5.26% and the annualised 6-month Swiss franc rate is 2.4%. Interest rates are annualised by semi- (half-yearly) compounding. The dealer is authorised to buy or sell up to US$5 million, or its equivalent in other currencies. Other relevant information is as follows: Transaction costs for dealing in hard currencies are US$5,500 per transaction, paid at the end of the 6-month period. The final profits, if any, are held in sterling. Borrowing and lending can be done at the rates given above. The current exchange rate for US$ to sterling is 2.00.

Describe, with the aid of suitable calculations, the actions necessary for the dealer to take advantage of such possibilities.