1. The ER between the Swiss franc and the US dollar is one to one in the spot market. The interest rates in Switzerland and the US are .01 and .03 respectively. Swiss franc. What kind of arbitrage will induce a profit for you, if the forward rate is .96 Swiss francs equal $1? Assume you start with $1 million.

• Expound on interest parity theory in the aforementioned context. Is the above situation sustainable?

2. If the inflation rates in the British pound and the US $ are 4% and 1% respectively, while the exchange rate is 1 pound exchanges for $2, what will the future spot rate be?

• What is the meaning of the above in the context of PPP?

3. If the interest rates are .07 and .05 in Argentina and Canada respectively, what will

happen to the peso versus the Canadian dollar, if presently they exchange as 10 pesos for

one dollar?

• Explain the concept of IFE with the aforementioned problem.

4. We have the following information. The spot exchange rates now and expected in a year

from now between the South African rand and the Mali West African franc (CFA) is .02

and .025 S. A. rand per CFA. The forward rate between the two currencies is .225 S.A.rand

per CFA. How would we speculate in the spot markets and in the forward one to attain a

profit? Presuppose, we have the equivalent of 10 million rand.