Question $2$

$(15$ marks$)$

Tshepo Molefe is a foreign exchange dealer with Investec South Africa. He notices the following quotes:

$\backslash$table$[[$Spot exchange rate,ZAR$1\mathrm{.}3220/$BWP$],[1$ year forward exchange rate,ZAR$1\mathrm{.}1492/$BWP$],[1$ year BWP interest rate,$5\mathrm{.}00\%$ per year$],[1$ year ZAR interest rate,$7\mathrm{.}50\%$ per year$]]$

$4$

FIN$4802/102/3/2025$

a$)$ the interest rate parity holding? You may ignore transaction costs.

$(3)$

b$)$ With the aid of calculations, show whether or not an arbitrage opportunity exists.

$(2)$

c$)$ In the event that there is an arbitrage opportunity, you are required to demonstrate all the steps that need to be taken to make an arbitrage profit. Assume that Tshepo Molefe is authorised to work with BWP$1000000$ in the Botswana Pula market, or ZAR$1322000$ in the South African Rand market. Compute the arbitrage profit.

$(7)$