1. What are the problems associated with using econometric models for forecasting exchange rates?
2. Refer to the previous question. Suppose you own an asset in Switzerland whose return is 7%. Calculate the risk premium on the Swiss asset from your viewpoint, assuming that you hedge currency risk. Then show it is the same as the risk premium on the Swiss asset from a Swiss investor's viewpoint.
3. You believe that the U.S. dollar will strongly depreciate against the euro in the next few weeks. What action can you take?
4. A Swedish investor bought 200 shares of IBM on January 1 on the New York Stock Exchange at $120. The exchange rate was SEK/USD = 7.00. Over the year, the investor has received a gross dividend of $5 per share. There is a 15% withholding tax levied by the United States. The exchange rate at the time of dividend payment was SEK/USD = 7.2. By December 31, the investor resells the IBM shares at $125, but the exchange rate has dropped suddenly to SEK/USD = 6.75. Ignoring commissions, what is the rate of return on the investment, in dollars and kronas, gross and net of taxes? The Swedish investor is taxed at 50% on income and 15% on capital gains; the U.S. withholding tax can be used as a tax credit in Sweden
5. Consider the following quotes.

Spot rate:$1.5000/Six month forward rate:$1.5625/

Six month U.S. interest rate: 6.000% p.a.Six month U.K. interest rate: 5.000% p.a.

a.Does interest rate parity hold?

b. If not, show the covered interest arbitrage. Use the equivalent of $50,000.