Question $3$

The spot dollar$-$pound rate is $$\frac{1\mathrm{.}40}{}1$ and the forward rate is also $$\frac{1\mathrm{.}40}{}1.$ You expect the spot dollar$-$pound rate to be $$\frac{1\mathrm{.}55}{}1$ in one year's time. You have $1$ million $($dollar equivalent is $$1\mathrm{.}4$ million$)$ to speculate with in the forward exchange market.

$($i$)$ Do you buy or sell $1$ million in the forward market? $(2$ marks$)$

$($ii$)$ What is your profit in both dollars and pounds if you are correct and the spot dollar sterling rate is $$\frac{1\mathrm{.}55}{}1$ in one year's time? Show your calculations. $(4$ marks$)$

$($iii$)$ What is your loss in dollars and pounds if you are wrong and the spot sterling rate is $$\frac{1\mathrm{.}20}{}1$ in one year's time? Show your calculations. $(4$ marks$)$

Question $4$

The euro is very strong against the US dollar due to increased supply of dollars in the foreign exchange market and has moved from $\frac{1\mathrm{.}30}{\text{\$}}1$ to $\frac{1\mathrm{.}10}{\text{\$}}1.$ The European Central Bank decides to intervene to move the exchange rate back to $\frac{1\mathrm{.}30}{\text{\$}}1.$ The intervention is of the non$-$sterilized kind. Using a diagram for the supply and demand for dollars in the forex market and also another diagram showing the overall demand and supply for Euros in the Eurozone area money markets, illustrate and comment on the intervention undertaken by the ECB including the effect on the ECB's foreign exchange reserves. Comment on the implications of the foreign exchange market intervention for the Eurozone money supply and short$-$term interest rate in the Eurozone area. How effective is the nonsterilized intervention by the ECB likely to be$?(10$ marks$)$

Question $5$

$($i$)$ What is the approximate annualized yield on a $6-$month Treasury bill with a face value of $100$ that is sold at $99$ in the primary market? Show your calculations. $(3$ marks$)$

$($ii$)$ A $10-$year Treasury bond $($TBOND$1)$ is sold on the market one day at $100$ with an annual coupon of $7.$ The following day bad news hits the global stock markets, and a new $10-$year Treasury bond $($TBOND $2)$ is sold on the market at a $5$ annual coupon. What is the approximate new secondary market price of TBOND$1?$ Show your calculations. $(3$ marks$)$

$($iii$)$ In a world where interest rates are rising and in your view are likely to continue to do so would you prefer to buy or short government bonds? Which would you be more likely to buy or short $5$ years bonds or $20-$year bonds? Explain your reasoning. $(4$ marks$)$