Question 2 US and the UK. Both A. Assume a two-country world consisting of the countries produce only US is $3.40 and in the UK it is E2. of uss/E that satisfies the absolute purchasing power pa one good, corn. Suppose the price of corn in the 00. What is the implied exchange rate urther, suppose annual inflation is 8% and 5% in the US and the UK respectively. What would the price US and the UK? Hence, what would the ex year be? Calculate the pound if the purchasing power parity holds of corn over the next year be in the pected exchange rate in one percentage depreciation or appreciation of the UK Assume no storage cost. [8 marks] B. It is June 2017 and Coopers Plc, a UK company, has on its books a short term loan of EUR50,000,000 from Deutschebank. Interest on the loan is charged at 4% per annum. The loan amount will be repaid in December 2017 plus interest over the six months to December. Assume it is June 15 and quotes on GBP/EUR futures contracts traded on the International Money Market are as given below. The contract EUR125,000 and the quotes are in GBP per EUR: Delivery month Settle Jun-17 Sep-17 Dec-17 0.830 0.831 0.832 I. Provide a qualitative description of Coopers ex II. Determine the set of transactions that Coopers will have to take to this exposure using the futures market. Construct a table showing the total amount payable in pounds the hedge, the profit/loss on the futures position, and the net amount payable in pounds, if in December the futures contract closes at: GBPO.825/EUR; (b) GBPO.830/EUR; (c) GBPO.835/EUR; () GBPO.8400/EUR. Assume there is no basis risk. III. without (a) [12 marks] END OF QUESTION 2 Page 5 of S9