Week 5

1. 1. Suppose that three-month interest rates in Australia are 7.66% for borrowing and 5.66% for lending and in New Zealand they are 8.63% for borrowing and 6.63% for lending. If the current spot rate is 1.1578 / 1.1601 AUD / NZD and the current three-month forward rate is 1.020 / 1.046 AUD / NZD.
   1. a) Would investors in either Australia or New Zealand be likely to invest overseas?
   2. b) As an arbitrageur where would you borrow?
   3. c) Assuming no additional transaction costs, what percentage arbitrage profit could be generated (Calculate as a percentage of your initial borrowings)?

2.

Week 5

1. On August 16, the spot quotation on the pound was GBP / USD 1.9833 with the September futures contract closing at 1.9843. Yet on the 1st August the pound was valued at around GBP / USD 2.04. What do you think has happened to the price of the September pound futures contract over the month of August? Why?