Suppose a basket ofgoods costs 210,000 Mexican pesos in Mexico, while the same basket costs$16,800 in Australia. The nominal exchange rate is currently atE$/Peso= 0.10, which means0.10 dollar per peso. Assume that over time the prices in two countries stayunchanged (that is, the inflation rates in two countries are always zero), andthe uncovered interest parity (UIP) holds. (a)Calculatethe real exchange rate between Australia and Mexico,q$/Peso.

(b)Is theAustralian dollar under or overvalued against Mexican peso at the moment? Why?

(c)The nominal exchange rate inone year is expected to becomeEe$/Peso= 0.097. Using the definition of the real exchange rate and zero inflationrates in two countries, calculate the expectedrealdepreciation/appreciationrate of Australia against Mexico in one year,qe$/Peso.

(d) Based on your answer in (c), calculatethe expectedrealexchange rate of Australia against Mexico in one year,qe$/Peso.

(e)The exchange rate in one yearis expected to be 0.097,Ee$/Peso= 0.097 as in (c), the current 1- year interest rate in Australia is 2%, and theuncovered interest parity (UIP) holds. The 1-year forward rate isF$/Peso= 0.10 (that is,$0.10 per peso in the forward market).If you can borrow $1 million from a bank in Australia or 10 millionpesos from a bank in Mexico, explainin detailhow you can make profitwithout any exchange rate risks.The answer should have the specific amountof risk-free profit in Australian dollars in one year.