Use the information below to answer the following questions.
Currency per U.S. $
Australia dollar
1.2389
6-months forward
1.2344
Japan Yen
100.4500
6-months forward
99.9300
U.K. Pound
.6797
6-months forward
.6776
Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 3 percent.
Use the approximate interest rate parity equation to answer the following questions.
a.
What must the six-month risk-free rate be in Australia?
(Enter your answer as a percent rounded to 2
decimal places, e.g., 32.16.)
b.
What must the six-month risk-free rate be in Japan?
(Enter your answer as a percent rounded to 2
c.
What must the six-month risk-free rate be in Great Britain?
(Enter your answer as a percent rounded to
2 decimal places, e.g., 32.16.)
Problem 31-7 Interest Rates and Arbitrage
The treasure of major U.S. firms has $33 million to invest for Three months. The annual interest
rate in the U.S. is 0.21 percent per month. The interest rate in Great Britain is 0.27 percent per
month. The spot exchange rate is 0.632 British pound. And the three-month forward rate is 0.634
British pound.
What would be the value of the investment if the money is invested in the U.S. and if It is invested
in Great Britain?
Problem 31-8 Inflation and Exchange rate
Suppose the current exchange rate for the polish zloty is Z2.78. The expected
exchange rate in three years is Z2.86. What is the difference in the annual inflation
rates for the U.S. and Poland over this period?

Problem 31-11 The International Fisher Effect.
1.
=D8-D7+D6
2.
=D9-D7+D6
3.
=D10-D7+D6
Problem 31-12 Spot vs Forward rates
Suppose the spot and three-month forward rates for the yen are Y79.35 and Y78.76, respectively.
What would you estimate is the difference between the annual inflation rates of the U.S. and
japan?
Difference in rates (-2.94)%
MC algo 31-19 Covered Interest Arbitrage
The spot rate between the U.K. and the U.S. is £.7624/$, while the one-year forward rate is
£.7542/$. The risk-free rate in the U.K. is 4.63 percent and risk-free rate in the United States
is 2.76 percent. How much in profit can you earn on $12,000 utilizing covered interest
arbitrage?
Profit = $360.91