Question: Question Explain the difference between UIP and CIP, and specifically how CIP leads to UIP. b. When there is a forward discount, what condition must

Question Explain the difference between UIP and CIP, and specifically how CIP leads to UIP. b. When there is a forward discount, what condition must be true (in CIP or UIP)? Explain how that condition leads to a forward discount. c. Suppose you have the following spot exchange rates: USD/AUD 0.5300 AUD/EUR 1.6428 USD/EUR 0.8782 1. Calculate the US dollar profit (per 1 USD), if any, on a three-point arbitrage.

2. Calculate AUD profit (per 1 AUD), if any, on a three-point arbitrage.

3. How can you explain the answers in (1) and (2)?

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