2. a) Consider the market data below: Euro () interest rate 0.75% - 1.5% p.a. Zambia (ZMK) interest rate 10.25% - 10.75% p.a. Spot exchange rate ZMK13.56/ - ZMK13.62/ 3-month forward exchange rate ZMK13.65/ - ZMK13.70/ i. Is there an opportunity for covered interest arbitrage if you borrowed 1 million to invest in Zambian Kwacha (ZMK) for 3 months? Clearly explain your answer showing all relevant calculations. [30 %] ii. What is the range of forward rates for which there will be no arbitrage opportunity from investing in ZMK? [10 %] b) Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed 20 million which is payable in 3 months time. The following information is available to you: Spot exchange rate $1.2331/ - $1.2453/ 3-month forward exchange rate $1.2342/ - $1.2486/ $ interest rate 4.6% - 4.8% p.a. interest rate 3.2% - 3.6% p.a. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge its foreign exchange exposure. Boeing is considering two hedging alternatives: a forward hedge and a money market hedge. i. Which alternative would you recommend and why? Clearly show your calculations. [30 %] ii. What is the forward rate that would make the two hedges equivalent? [10 %] c) A U.K. company needs to raise AUD1,000,000. It plans to raise this money by issuing pound-denominated bonds and using a currency swap to convert the pounds to Australian dollars (AUD). The company expects interest rates in both the U.K. and Australia to rise. i. Should the swap be structured with interest paid at a fixed or a floating rate? Justify your answer clearly. [10 %] ii. Should the swap be structured with interest received at a fixed or a floating rate? Justify your answer clearly. [10 %] 2. a) Consider the market data below: Euro () interest rate 0.75% - 1.5% p.a. Zambia (ZMK) interest rate 10.25% - 10.75% p.a. Spot exchange rate ZMK13.56/ - ZMK13.62/ 3-month forward exchange rate ZMK13.65/ - ZMK13.70/ i. Is there an opportunity for covered interest arbitrage if you borrowed 1 million to invest in Zambian Kwacha (ZMK) for 3 months? Clearly explain your answer showing all relevant calculations. [30 %] ii. What is the range of forward rates for which there will be no arbitrage opportunity from investing in ZMK? [10 %] b) Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed 20 million which is payable in 3 months time. The following information is available to you: Spot exchange rate $1.2331/ - $1.2453/ 3-month forward exchange rate $1.2342/ - $1.2486/ $ interest rate 4.6% - 4.8% p.a. interest rate 3.2% - 3.6% p.a. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge its foreign exchange exposure. Boeing is considering two hedging alternatives: a forward hedge and a money market hedge. i. Which alternative would you recommend and why? Clearly show your calculations. [30 %] ii. What is the forward rate that would make the two hedges equivalent? [10 %] c) A U.K. company needs to raise AUD1,000,000. It plans to raise this money by issuing pound-denominated bonds and using a currency swap to convert the pounds to Australian dollars (AUD). The company expects interest rates in both the U.K. and Australia to rise. i. Should the swap be structured with interest paid at a fixed or a floating rate? Justify your answer clearly. [10 %] ii. Should the swap be structured with interest received at a fixed or a floating rate? Justify your answer clearly. [10 %] g