Q.5 Speculation on the foreign exchange markets (30pts)

a) From the excess return formula, show how the break-even point for the exchange rate is obtained;

b) From this formula, calculate the breakeven point (SBF) knowing the following information:

- Spot exchange rate (spot) = $1.60/;

-Investment of $10000 for one year;

-U.S. interest = 7.93% p.a.;

-GBP interest = 12.11% p.a.;

-Table of normal law.

c) At what minimum rate is the investment repaid?

d) From the previous information, calculate the probability of losing with 11.6% standard deviation of the appreciation.