The following annual interest rates were reported for Argentina on 23rd November 2001: Interbank rate among major financial institutions (dollars): 2.1% Interbank rate among Argentine banks (dollars): 35.6% Interbank rate among Argentine banks (pesos): 58.1% Assume that CIP and UIP hold. Default risk is the same whether Argentine loans are in pesos or dollars. The spot rate as of 23/11/01 was 1peso/dollar.

(a) What is the 12-month peso forward rate that would cover the interest differential in the Argentina interbank market?

(b) Suppose that if Argentina devalues, the new peso/$ rate will be 5. What is the probability of devaluation implied by the forward rate calculated in (a)?

(c) Suppose a speculator sold pesos forward at the rate in part (a) and the peso devalued to 5 pesos/$. What is the profit per 100 pesos sold forward?

(d) Suppose in question (c) the peso does not devalue. What is the profit per 100 pesos sold forward?

(e) What would the inter-bank rate in Argentina be if investors believed the peg were perfectly credible?