1. Suppose PepsiCos bank provides the following quotes on November 1, 2020. Use this information to answer parts (i) (ii) below:

Interest rates (all rates are % on annual basis) as of Nov 1, 2020:

Deposit Lending

3-month INR 3.5 3.8

3-month U.S.$ 0.5 0.7

Spot & Forward (on Nov.1): Banks Bid Banks Ask

Spot #INR/1$ INR73.20/$ INR 73.50/$

3-month forward #INR/1$ INR74.15/$ INR 74. 50/$

1. (6 points) Using the spot Ask and the forward Ask quotes above, what is the annualized forward premium or discount for the U.S. $ vs. the Indian Rupee? What does this premium or discount imply for the expected future change in the INR/$ exchange rate facing PepsiCo facing over the next 3 months?

2. (6 points) Suppose a trader at PepsiCos bank considers a carry trade strategy between the U.S.$ and the INR over the next three months. For what range of future INR/$ spot rates (3 months from now) will the carry trade strategy be profitable? What is the risk?