Question: 5. Consider Problem 1, again. (a) Does uncovered interest parity predict an appreciation or depreciation of the Australian dollar against the U.S. dollar over the

5. Consider Problem 1, again.

(a) Does uncovered interest parity predict an appreciation or depreciation of the Australian dollar against the U.S. dollar over the next 180 days?

(b) Assume 180 days later the Australian dollar is exchanged for $0.90. Could an investor make arbitrage profit over the 180-day period? Why? Describe the strategy and quantify the profit.

1. Assume annualized interest rates in the U.S. and Australia are 4% and 10%, respectively, and the Australian dollar can be exchanged for $0.78.

(a) According to covered interest parity (CIP), is the Australian dollar quoted at a forward discount or at a forward premium at the 180-day maturity? Use approximate CIP.

AUD is quoted at a discount

(b) Under no arbitrage, what is the 180-day forward rate for the Australian dollar ( USD AUD )?

.7577 USD/AUD

1.3198 AUD/USD

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