QUESTION 2 16 points Save Answer Dash Knight, Credit Suisse (London), observes that the /A$ spot rate has been holding steady, and both dollar and Euro interest rates have remained relatively fixed over the past few weeks. Dash wonders if he should try an interest arbitrage strategy and thereby save the cost of forward cover. Many of Dash's research associates and their computer models - are predicting the spot rate to be to 1.0000/A$ for the coming 360 days. Assume each year has 360 days and the interest rate for short loans is priced using the simple interest rate method. Assumptions Value Arbitrage funds available (AS) AUD 2,000,000 YEN Equivalent arbitrage funds available () 164,000,000 Spot rate (/AS) 1.1000 360-day forward rate ( A$) 1.0500 AU dollar interest rate p.a. 3.000% Euro interest rate p.a. 1.000% (a) Calculate the forward premium/discount for the forward rate (/A$) where the domestic currency is Euros. (2 marks) (b) Calculate the gain in A$ from a covered interest arbitrage (CIA) strategy using the 360-day forward rate. (4 marks) (c) Calculate the expected gain in AS from an uncovered interest arbitrage (UIA) strategy using the expected spot rate in 360 days predicted by Dash's research associates. (4 marks) (d) Will Dash still be able to maintain his expected gain in question b) if the actual spot rate 360 days later turns out to be 1.0500 (/A$)? (3 marks) (e) How effective is the international parity conditions in predicting the exchange rate changes? Why or why not? (3 marks) For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). QUESTION 2 16 points Save Answer Dash Knight, Credit Suisse (London), observes that the /A$ spot rate has been holding steady, and both dollar and Euro interest rates have remained relatively fixed over the past few weeks. Dash wonders if he should try an interest arbitrage strategy and thereby save the cost of forward cover. Many of Dash's research associates and their computer models - are predicting the spot rate to be to 1.0000/A$ for the coming 360 days. Assume each year has 360 days and the interest rate for short loans is priced using the simple interest rate method. Assumptions Value Arbitrage funds available (AS) AUD 2,000,000 YEN Equivalent arbitrage funds available () 164,000,000 Spot rate (/AS) 1.1000 360-day forward rate ( A$) 1.0500 AU dollar interest rate p.a. 3.000% Euro interest rate p.a. 1.000% (a) Calculate the forward premium/discount for the forward rate (/A$) where the domestic currency is Euros. (2 marks) (b) Calculate the gain in A$ from a covered interest arbitrage (CIA) strategy using the 360-day forward rate. (4 marks) (c) Calculate the expected gain in AS from an uncovered interest arbitrage (UIA) strategy using the expected spot rate in 360 days predicted by Dash's research associates. (4 marks) (d) Will Dash still be able to maintain his expected gain in question b) if the actual spot rate 360 days later turns out to be 1.0500 (/A$)? (3 marks) (e) How effective is the international parity conditions in predicting the exchange rate changes? Why or why not? (3 marks) For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac)