3. (a) You are given the following data: the spot exchange rate is USD/EUR 1.21; the p.a. simple interest rate on a six-month deposit is 4 percent in the US and 5 percent in Europe. Compute:

(i)The forward rate for a six-month forward contract

(ii) The time-T EUR value of a USD_T 1 six-month forward sale

(iii)The time-t EUR value of a USD_T 1 six-month forward sale

(iv) The time-T EUR value of a EUR_t 1 six-month investment

(v)The time-t USD value of a EUR_t 1 six-month forward sale

(40 marks)

(b)Suppose you are quoted the following EUR/USD spot and forward rates:

Spot3-month forwardp.a. 3-month

bid-askbid-askinterest rate

EUR5.50-5.60

USD0.80-0.900.85-0.924.00-4.40

(i)What are the 3-month synthetic-forward EUR/USD bid-ask rates?

(ii) Are there any arbitrage opportunities? Are there any opportunities for least-cost dealing at the synthetic rate? If yes, explain how you would take advantage of them.