1. Assume annualized interest rates in the U.S. and Australia are 4% and 10%, respectively,and the Australian dollar can be exchanged for $0.78.
(a) According to covered interest parity (CIP), is the Australian dollar quoted at a for-ward discount or at a forward premium at the 180-day maturity? Use approximateCIP.
(b) Under no arbitrage, what is the 180-day forward rate for the Australian dollar(USD/AUD)?
(c) Under no arbitrage, what is the 180-day forward rate for the U.S. dollar (AUD/USD)?
2. Consider Problem 1, again.
(a) Does uncovered interest parity predict an appreciation or depreciation of the Aus-tralian dollar against the U.S. dollar over the next 180 days?
(b) Assume 180 days later the Australian dollar is exchanged for $0.90. Could an in-vestor make arbitrage profit over the 180-day period? Why? Describe the strategyand quantify the profit.
(c) Given b), was the 180-day forward rate a good predictor of the future spot rate? Why?