The spot rate of the Brazilian Real (BRL) is $0.44 US. The one-year U.S. interest rate is 6.25% and the one-year Brazilian interest rate is 2.45%.

Question 1: Assuming the existence of interest rate parity, determine the forward premium or discount of the Brazilian Real (be sure to identify whether it is a premium or a discount). Check figure: +0.0371 or premium of 3.71% for the Real; use the equation on p.461.

Question 2: Given the forward premium for the Real that you solved for in question 1, now estimate the forward exchange rate (FR) of the Brazilian Real. Hint: p = (FR S)/S now solving for FR.

Question 3: Given interest rate parity, assume that the forward rate of the Brazilian Real is the same as the spot rate, one BRL = $0.44 US. Explain how Brazilian investors could use covered interest arbitrage to lock in a yield higher than 2.45%.