Transcribed Image Text
3.A Assume that today is 21 March 2019. Today, you observe thatthe exchange rate between AU$ and the US$ is 1.319, EAU$/US$=1.319,the 90-day interest rate in Australia is 0.50%, the 90-day interestrate in the US is 0.22%, and the 90-day forward rate is 1.376,FAU$/US$=1.376. Note that the covered interest parity does not holdhere. Explain how you can make risk free profits using spot andforward markets in 90 days, on 20 May 2019, if you can eitherborrow AU$1.319 million Australian dollars or borrow US$1 milliondollars with the interest rates above today. The answer should havethe exact amount of profits in Australian dollars. Hint: outlineall investment steps and show all calculations. Do not forget topay the principal and interests on 20 May 2019. [6 marks]3.B. Using diagrams explain what will happen to the current spotexchange rate (increase, decrease, or no change) if the forwardrate in (A) and the nominal interest rates in two countries remainthe same (the answer should have the change in the demand for orthe supply of euros in the foreign exchange market and also thevalue of the for new exchange rate).