The spot rate between SEK and RUB is expected to go from 0.122 to 0.114 (RUB/SEK). The inflation in Sweden is expected to be 4.5% at the same time.

a) How high is the inflation in Russia expected to be?

b) If the real rate in Sweden is 1%, how high will the nominal rates be in the countries respectively?

c) Assume that the price for a one year term is 0.112, according to which parity can you make assumption and analysis according to if the term price is correct or not?

d) Use the information and answer in part c) and explain the term arbitrage and show using a transaction how the arbitrage can take place given the information used and calculated in the exercise.

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