C$.$ Describe how arbitrage activities affect currency spot and forward markets and two countries credit $m^{\text{a}\text{r}\text{k}\text{e}\text{t}\text{s}\text{s}\text{u}\text{c}\text{h}\text{t}\text{h}\text{a}\text{t}\text{I}\text{R}\text{P}\text{h}\text{o}\text{l}\text{d}\text{s}(10\text{p}\text{o}\text{i}\text{n}\text{t}\text{s}).}$

$2.$ Consider the historical financial data in Table above for the following questions.

$\backslash$table$[[$Year$,$Interest Rate,Spot ExR

Spata, the US and the UK$],[2020,$US$,$UK$,$Spot EXR,Inflation Rate$],[2021,5\%,3\%,1,$US$,$UK$],[2022,6\%,4\%,1\mathrm{.}0000,3\%,5\%],[2023,5\%,2\%,0500,2\%,10\%],[,3\%,4\%,1\mathrm{.}1000,5\%,3\%],[,,,1\mathrm{.}0500,2\%,5\%]]$

Using the IRP model, predict spot exchange rates for Years $2021,2022,$ and $2023(10$ points$).$

$3.$ Consider the following option.

Long a call option with X$-$price $$\frac{1\mathrm{.}18}{}$ at a premium of $$\frac{0\mathrm{.}02}{}$

A$.$ Plot the payoff chart of the above option. $(10$ points$)$

B$.$ Mark the break$-$even point. $(5$ points$)$

C$.$ Write up the maximum net profit and loss on the grid paper. $(5$ points$)$

$4.$ Consider the following option strategy of two call options $.$

Long a call option with X$-$price $$\frac{1\mathrm{.}15}{}$ at a premium of $$\frac{0\mathrm{.}03}{}$ Short a call option with X$-$price $$\frac{1\mathrm{.}20}{}$ at a premium of $$\frac{0\mathrm{.}02}{}$

A$.$ Plot the payoff chart of the above option strategy $(10$ points$).$

B$.$ Compute and Mark the break$-$even point on the grid paper $(5$ points$).$

C$.$ Write up the maximum net profit and loss on the grid paper. $(5$ points

$3|P||$