QUESTION $1)$

Currently, the spot exchange rate is $$0\mathrm{.}85/$A$ and the one$-$year forward exchange rate is $$0\mathrm{.}81/$A$$.$ One$-$year interest is $3\mathrm{.}5\%$ in the United States and $5\%$ in Australia. You may borrow up to $$1,000,000$ or A$$1,176,471,$ which is equivalent to $$1,000,000$ at the current spot rate.

a$)$ Determine if IRP is holding between Australia and the United States.

b$)$ If IRP is not holding, explain in detail how you would realize certain profit in U$.$S$.$ dollar terms.

QUESTION $2)$

Ford and Fiat companies can borrow for a five$-$year term at the following rates:

Ford Fiat

Fixed$-$rate borrowing cost : $10\%12\mathrm{.}0\%$

Floating$-$rate borrowing cost : LIBOR QUESTION $1)(40$ points$)$

Currently, the spot exchange rate is $$\frac{0\mathrm{.}85}{A}$$ and the one$-$year forward exchange rate

is $$\frac{0\mathrm{.}81}{A}$$$.$ One$-$year interest is $3\mathrm{.}5\%$ in the United States and $5\%$ in Australia.

You may borrow up to $$1,000,000$ or $A$$$1,176,471,$ which is equivalent to $$1,000,000$ at the

current spot rate.

a$)$ Determine if IRP is holding between Australia and the United States.

b$)$ If IRP is not holding, explain in detail how you would realize certain profit in U$.$S$.$ dollar

terms. QUESTION $2)(40$ points$)$

Ford and Fiat companies can borrow for a five$-$year term at the following rates:

a$.$ Calculate the quality spread differential $($QSD$).$

b$.$ Assume that Citibank is involved as swap bank in this transaction.

Develop and design an interest rate swap in which both Ford and Fiat companies have savings

in their borrowing costs and that Citibank has a net gain.LIBOR $+1\%$

a$.$ Calculate the quality spread differential $($QSD$).$

b$.$ Assume that Citibank is involved as swap bank in this transaction.

Develop and design an interest rate swap in which both Ford and Fiat companies have savings in their borrowing costs and that Citibank has a net gain.