Reuter provides you with the following information. The spo t exchange rate of the Swedish krona is equal to 5.7 SKr per U.S. dollar. The annualized three-month nominal interest rates are 12% in SKr and 8% in dollars.

a. What is the three-month forward exchange rate?

b. Is krona appreciating or depreciating relative to the U.S. dollar?

c. Suppose that the market three-month forward rate is 6 SKr per U.S. dollar. Do you have an arbitrage opportunity? If not, explain why, if yes, sketch t he arbitrage operation.

d. A Swedish exporting firm expects to be paid $1 million in three months. Please simulate the SKr value of this payment if in three months, the spot exchang e rate is equal to USD:SKr = 5 and USD:SKr = 6. What would be the value of this payment if the firm h ad hedged against currency movements using the forward rate calculated in (a)?