Question: BE630-6-SP/4 QUESTION THREE (a) Define uncovered interest rate parity (UIP). Derive the equations of UIP in both levels and logs. (5 Marks) (b) Let the

BE630-6-SP/4 QUESTION THREE (a) Define uncovered interest rate parity (UIP). Derive

BE630-6-SP/4 QUESTION THREE (a) Define uncovered interest rate parity (UIP). Derive the equations of UIP in both levels and logs. (5 Marks) (b) Let the spot rate between UK and the US be 0.50 GBP/USD, and the domestic UK 6 month (annualised) interest rate is 6% and the 6 month (annualised) US interest rate is 10%. (i) What is the implied 6 month forward rate? (5 Marks) (ii) If the actual 6 month forward rate was 0.90 GBP/USD, demonstrate how you make an arbitrage profit if you want to borrow 100 GBP. (5 Marks) [TOTAL - 15 MARKS] END OF QUESTON 3

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