The Apple special edition watch is currently selling at 269 in the UK and at RM1,199 in Malaysia. The bid-ask exchange rate between the Pound and the Ringgit are currently quoted at RM5.33 - RM5.37 per . The interest rate in the UK, and the inflation rates in the UK and Malaysia are as follows

Interest rate in the UK 2.5% p.a.

Inflation rate in the UK 2% p.a.

Inflation rate in Malaysia 3% p.a.

a) Using the Absolute Purchasing Power Parity relation, calculate the current exchange rate of RM per . (2 marks)

b) Based on your answer in part a), is Ringgit overpriced or underpriced? Explain your reasoning and calculate the arbitrage profits. (2 marks)

c) Assume that the Relative Purchasing Power Parity holds. Estimate the expected spot exchange rate of RM per a year from today. (3 marks)

d) If the International Fisher Parity holds, what should be the real and nominal interest rate in Malaysia (show your calculations)? (3 marks)

e) Assume that interest rates remain unchanged in both countries for the next year. Based on the Interest Rate Parity relation calculate the expected spot exchange rate of RM per (bid and ask) one year from now. Show your calculations. (3 marks)

f) If the 1-year forward rate is currently quoted at RM5.50 - RM5.55 per , show how an arbitrageur is able to perform covered interest arbitrage with either borrowings or 1 million or RM1 million. Show your calculations.