You are a Norwegian trader who has to decide to either invest in Norway or in the UK You have no liquidity at your disposal and your investment horizon is 1 year Both Norway and the UK do not have any default risk during this 1 year horizon Interest rates on lending and borrowing are the same The interest rate in Norway is equal to 5 , whereas in the UK it is 2 The spot exchange rate is equal to 11GBP, and the 1 year forward rate is 11 5GBP Compute the annual forward premium in percentage points Is the GBP trading at a premium or at a discount Use two decimal digits (5 points) In order to perform an arbitrage, you borrow in one country and you invest in the other Borrow in the country that you decide, and invest in the other Assume to borrow 1,000,000 units of the currency of that country Describe all the steps of the arbitrage How much is the arbitrage profit (15points) 3 Compute the value of the forward contract that we would observe if the CIP condition were satisfied, and compare it with the forward rate observed in the market Should the NOK be stronger or weaker according to the CIP with respect to the value quoted on the market (10 points)

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You are a Norwegian trader who has to decide to either invest in Norway or in the UK. You have no liquidity at your disposal

You are a Norwegian trader who has to decide to either invest in Norway or in the UK. You have no liquidity at your disposal and your investment horizon is 1 year. Both Norway and the UK do not have any default risk during this 1-year horizon. Interest rates on lending and borrowing are the same. The interest rate in Norway is equal to 5%, whereas in the UK it is 2%. The spot exchange rate is equal to = 11GBP, and the 1-year forward rate is = 11.5GBP.

Compute the annual forward premium in percentage points. Is the GBP trading at a premium or at a discount? Use two decimal digits. (5 points)
In order to perform an arbitrage, you borrow in one country and you invest in the other. Borrow in the country that you decide, and invest in the other. Assume to borrow 1,000,000 units of the currency of that country. Describe all the steps of the arbitrage. How much is the arbitrage profit? (15points)

3. Compute the value of the forward contract that we would observe if the CIP condition were satisfied, and compare it with the forward rate observed in the market. Should the NOK be stronger or weaker according to the CIP with respect to the value quoted on the market? (10 points)