1. (31 points) (Ch. 7-8) Forecasting with a Forward Rate Based on IRP. Assume that the fiveyear annualized interest rate in the United States is 9 percent, and the five-year annualized interest rate in Singapore is 5 percent. Assume interest rate parity (IRP) holds for a five-year horizon, and the interests are annually compounded. Assume that the spot rate of the Singapore dollar (SGD) is USD 0.74, which also means the spot rate of SGDUSD. Questions: a. If there is a five-year SGDUSD forward contract, what is the forward exchange rate? (10 points) b. If this forward rate is used to forecast exchange rates, what will be the forecast for the Singapore dollars spot rate in five years? (5 points) What percentage appreciation or depreciation does this forecast imply over the five-year period? (5 points) c. What is the theory behind the forecast of the spot exchange rate in the future in the previous question b? (5 points) d. Based on the theory in question c, what are the assumptions? (6 points) 2. (20 points) (Ch. 10) Extending VaR. Sao Paulo FC, a Brazilian soccer club, sold a player to France for EUR 12M, which is the amount to be received after 30 days. Sao Paulo FC wants to calculate the VaR(99%) for the next payment in 30 days. Sao Paulo FC believes monthly EURBRL changes (ef,t) follow a normal distribution, where BRL means the Brazilian real. Sao Paulo FC estimates the mean and the variance from the empirical distribution of the monthly EURBRL changes from the past 10 years: u = Monthly mean = 0.044 2 o2=Monthly variance = 0.0169 St = 5.4 EURBRL I) (i)Calculate the Transaction Exposure (TE) denominated in the local currency, BRL. (8 points) (ii) Calculate the 30-day VaR(99%) (HINT: use z = 2.33). (12 points)