Part A Why do you think that MNCs usually enjoy lower cost of capital than purely domestic firms? Does it mean that they are less risky but more profitable than purely domestic firms? Explain. Part B Assuming no transaction costs, Barclays Bank quotes Australian dollar (A\$) per pound sterling ()=A$1.90/, Suisse Bank quotes euros () per pound sterling ()=1.53/ and ANZ quotes Australian dollar (A\$) per euros ()=A$1.25/, do you detect any arbitrage opportunities here? If so, how could you (i.e., which ways) take profitable advantage of these rates? And what will be your arbitrage gains, if any (use a hypothetical investment amount of Australian dollar ten million)? (Must show your workings). [4+6=10marks] Question 5 You are working in the Forex Division of Flaggy Bank, Melbourne. You regularly report to your boss, the Manager of the Treasury and Forex Division. Suppose you observe the following interest rates, exchange rates and inflation rates between Australia and the UK. 3-month (annualized) interest rates in Australia and the UK are 7% and 3\%, respectively. Spot and 3-month forward exchange rates, respectively, are A$1.80/f and A$1.85/. Inflation rates in Australia and the UK are 4% and 5.5%, respectively. Using the above information, A. Could you advise your manager whether interest rate parity (IRP) holds between Australia and the UK? (Must show your calculations to advise your manager). If IRP does not hold, from where do you recommend that your bank should borrow and invest and why? B. Assuming no transaction costs, what would your bank's covered interest arbitrage profit (or loss) be on the borrowed amount of A$1 million or dollar-equivalent pound? (Must show your workings)? Part A Why do you think that MNCs usually enjoy lower cost of capital than purely domestic firms? Does it mean that they are less risky but more profitable than purely domestic firms? Explain. Part B Assuming no transaction costs, Barclays Bank quotes Australian dollar (A\$) per pound sterling ()=A$1.90/, Suisse Bank quotes euros () per pound sterling ()=1.53/ and ANZ quotes Australian dollar (A\$) per euros ()=A$1.25/, do you detect any arbitrage opportunities here? If so, how could you (i.e., which ways) take profitable advantage of these rates? And what will be your arbitrage gains, if any (use a hypothetical investment amount of Australian dollar ten million)? (Must show your workings). [4+6=10marks] Question 5 You are working in the Forex Division of Flaggy Bank, Melbourne. You regularly report to your boss, the Manager of the Treasury and Forex Division. Suppose you observe the following interest rates, exchange rates and inflation rates between Australia and the UK. 3-month (annualized) interest rates in Australia and the UK are 7% and 3\%, respectively. Spot and 3-month forward exchange rates, respectively, are A$1.80/f and A$1.85/. Inflation rates in Australia and the UK are 4% and 5.5%, respectively. Using the above information, A. Could you advise your manager whether interest rate parity (IRP) holds between Australia and the UK? (Must show your calculations to advise your manager). If IRP does not hold, from where do you recommend that your bank should borrow and invest and why? B. Assuming no transaction costs, what would your bank's covered interest arbitrage profit (or loss) be on the borrowed amount of A$1 million or dollar-equivalent pound? (Must show your workings)