1. Plot a graph with interest rate differentials of 1-year bonds (Currency AUD interest minus currency BRL interest) on the y axis and the appreciation of the currency AUD against currency BRL over the 1-year investment period on the x-axis.

2. If you like, you can even run a regression analysis to check if interest 1 - interest 2 = beta*(currency 1/ currency 2 at time 0 - currency 1/ currency 2time (0+1)) + u has beta different to -1. However, this is not essential at all, as the graph will provide good visual information already and we focus on the economics not econometrics in this class.

3. Is your graph consistent with the theory of the interest rate parity condition?

4. If not, what trading strategy do you suggest and what are the risk(s) involved?

5. For this a time series graph comparing the yield in the first country with the yield - FX losses of the other country is usefully.

6. What kind of risks might explain any arbitrage opportunities you found?