4. (a) Discuss default risk and illiquidity of forward contracts.(20 marks)

(b) You are given the following data: the spot exchange rate is CZK/USD 21; the p.a. simple interest rate on a three-month deposit is 8 percent in the Czech Republic and 6 percent in the US. Compute:

(i)The time-T USD value of a USDt 1 investment

(ii)The time-t CZK value of a CZKT 1 loan

(iii)The forward rate for a three-month forward contract

(iv)The time-T CZK proceeds from a USDT 1 forward sale, given the forward rate computed in (iii)

(v)The present value of the proceeds in question (iv)

(vi)The time-t CZK value of a USD_t 1 spot sale

(vii)The value, in CZK_t, of the proceeds of a USD_T 1 loan