The information below on exchange rate behaviour is from the foreign exchange

department for a large company. Use it in answering the questions below:

Beginning of the Year

Spot rate of = $1.596

Spot rate of Australian dollar (A$) = $0.7

Cross exchange rate: =A$2.28

One-year forward rate of A$ = $0.71

One-year forward rate of = $1.58004

One-year U.S. interest rate = 8.00%

One-year British interest rate = 9.09%

One-year Australian interest rate = 7.00%

1. Determine whether triangular arbitrage is feasible and, if so, how it should be conducted

to make a profit, (you may use any amount of any of the currencies of interest in your

analysis).

2. Using the information, determine whether covered interest arbitrage is feasible and, if so,

how should it be conducted to make a profit.

3. Based on the information for the beginning of the year, use the international Fisher effect

(IFE) theory to forecast the annual percentage change in the British pound's value over the

year.

4. Assume that at the beginning of the year, the pound's value is in equilibrium. Assume that

over the year the British inflation rate is 6 percent, while the US inflation rate is 4 percent.

Assume that any change in the pound's value due to the inflation differential has occurred

by the end of the year. Using this information and the information provided, determine how

the pound's value changed over the year.