You are a Norwegian trader who is looking at the following data: - The 1-year interest rates in Norway, , is equal to 3%;

- The 1-year interest rates in the US, is equal to 1%; - Spot exchange rate is equal to

The 1-year forward rate is

A) Compute the forward premium in percentage points. Is the NOK trading at a premium or at a discount?

B) Observing the data, you discovered an arbitrage opportunity. Show how to realize a certain profit via covered interest arbitrage. Assume that you can borrow either USD 1,000,000 or NOK 1,000,000 for one year. (Hint: In order to perform a covered interest arbitrage, you borrow in one country and you invest in the other. Thus, you need to decide in which country you borrow, then invest in the other.)

C) What is the forward rate that we would observe if the covered interest parity (CIP) condition were satisfied? (Use 4 decimals)

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