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U.S. is the home country and assume 360 days in a year. US Europe Nominal interest rate per annum 17.8% 7% Expected inflation rate per

U.S. is the home country and assume 360 days in a year.

US

Europe

Nominal interest rate per annum

17.8%

7%

Expected inflation rate per annum

14.5%

4%

Spot rate for US$/Euro

$1.0/

180-day forward rate for US$/Euro

$1.05

(a) Based on the actual spot and forward rates given, what is the actual forward premium/discount on euro on an annualized basis?

(b) According to Interest Rate Parity and based on the actual nominal interest rates given,

(1) what should be the forward premium/discount on euro on an annualized basis? (4 marks)

(2) what should be the 180-day forward rate for US$/euro?

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