Use information contained in the Integrative Problem after Chapter 8 on page 262 of your text book and develop responses to questions 1 through 5. You have to prepare 2-3 page report, excluding cover page on your findings. All relevant computations must be shown.

Questions

1. As an employee of the foreign exchange department for a large company, you have

been given the following information:

Beginning of Year

Spot rate of £ = $1.596

Spot rate of Australian dollar (A$) = $.70

Cross exchange rate: £1 = A$2.28

One-year forward rate of A$ = $.71

One-year forward rate of £ = $1.58004

One-year U.S. interest rate = 8.00%

One-year British interest rate = 9.09%

One-year Australian interest rate = 7.00%

Determine whether triangular arbitrage is feasible and, if so, how it should be conducted

to make a profit.

2. Using the information in question 1, determine whether covered interest arbitrage

is feasible and, if so, how it should be conducted to make a profit.

3. Based on the information in question 1 for the beginning of the year, use the international

Fisher effect (IFE) theory to forecast the annual percentage change in the

British pound's value over the year.

4. Assume that at the beginning of the year, the pound's value is in equilibrium. Assume

that over the year the British inflation rate is 6 percent, while the U.S. inflation rate

is 4 percent. Assume that any change in the pound's value due to the inflation differential

has occurred by the end of the year. Using this information and the information provided

in question 1, determine how the pound's value changed over the year.

5. Assume that the pound's depreciation over the year was attributed directly to central

bank intervention. Explain the type of direct intervention that would place downward

pressure on the value of the pound.