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Q 5(c) [10 Marks]

Dries is a risk-neutral investor based London. He intends to exploit the

deviations

from UIP between AUD and JPY since the Japanese interest rate is 1% while the

Australian interest rate is 10%. From the newspaper he reads that AUD is expected

to depreciate by 1% against JPY, and the JPY will depreciate by 7% against GBP.

What would be the expected excess return in GBP on his carry trade strategy?

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