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Rate of return under covered interest arbitrage

Problem 1) The premium on a pound call and put option is $.03 per unit. The exercise priceis $1.60. What are the break even points for the buyer of the call option and for the buyer of the put option? (Assume zero tranasactions cost and that the buyer and seller of the put option are speculators).

Problem 2) Assume the bid rate of a new Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and excute locational arbitrage.

Problem 3) Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20 . What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

Problem 4) Assume the following information:

Spot Rate today of Swiss franc = $.60

1-year forward rate as of today for Swiss franc = $.63

Expected spot rate 1-year from now = $.64

Rate on 1-year deposits denominated in Swiss francs = 7%

Rate on 1-year deposits denominated in US dollars = 9%

From the perspective of US invetors with $1,000,000, what would be rate of return under covered interest arbitrage?

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## Q : Translation exposure-interest rate parity

Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then: