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Unformatted text preview: Explain. b) Given you are working for a large financial institution, your firm has the ability to move the market (i.e. it can affect/change the spot exchange rate, the forward exchange rate, and the bond yields in both countries when your firm carries transactions in the spot and forward exchange markets and the bond markets), what happens to these variables after your transactions? Explain. (8 points) c) Will (covered) interest rate parity hold after your transactions? Why? (4 points) Note: You need to use covered interest rate parity in the question. Quote the exchange rates as E / and F / . Use the names of the currencies mentioned in the question, not DC and FC, in your answer. 1 Keep your answer in 4 decimal points if necessary. 2...
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