Please see attached document for questions! Thank you so much

1. Interest Rate Parities Explain the difference between the covered and uncovered interest rate parities. Then answer questions below. (a) A foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a (b) The same trader observes that the /$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. He 2. Interest Rate Parity, Purchasing Power Parity, International Fisher Effect Separated by more than 3,000 nautical miles and five time zones, money and foreign exchange markets in both London and New York are very efficient. The following Assumptions London New York Spot exchange rate ($/pound) One-year Treasury bill rate Expected inflation rate 1.3264 2.900% Unknown 1.3264 2.500% 1.250% a. Estimate today's one-year forward exchange rate F between the dollar and the pound using Covered Interest Rate Parity. b. Find approximate expected inflation in London next year. Is it smaller or larger than New York expected inflation? Why? You can do the forecast using PPP or International Fisher Effect. If you use PPP then assume that the Expected exchange rate E(S) is the same as the forward exchange rate F that you found in (a). Then solve for expected inflation in London using PPP formula. If you use International Fisher effect assume that the real interest rates for two countries are the same. 3. Speculation in the Forward Market. The current spot exchange rate is $1.95/ and the three-month forward rate is $1.90/. Based on your analysis of the exchange rate, you are pretty confident that the spot 1 exchange rate will be $1.92/ in three months. Assume that you would like to buy or sell 1,000,000. a. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? b. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.86/. 2