1. Suppose you observe a spot exchange rate of $1.0500/. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 4 month forward rate in direct quotation for the USD?HINT: Solve for Forward using the IRP Formula.
2. James Clark is a foreign exchange trader with Citibank. He notices the following quotes.

Spot exchange rateUSD1.2051/SFr

Six-month forward exchange rateUSD1.1922/SFr

Six-month $ interest rate8% per year

Six-month SFr interest rate10% per year

• Is the interest rate parity holding?You may ignore transaction costs.
• Is there an arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in Swiss Francs.

3.Currently, the spot exchange rate is $1.52/ and the three-month forward exchange rate is $1.54/. The three-month interest rate is 8.4% per annum in the U.S. and 5.84% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or 1,000,000.

a. Determine whether the interest rate parity is currently holding.

b. If the IRP is not holding, determine the arbitrage profit.