5 21

1.
1 Covered and Uncovered Interest Rate Parity

USD/GBP=1.4457
7.5% 6.5% USD/GBP

2Suppose now in US, the interest rate for one year treasury bill is 5%, and in UK,
the interest rate for treasury bill of the same duration is 9%, In London, the current
spot rate between USD and GBP is, GBP1= USD 1.5100~1.5120, and 12 moths
forward rate is, GBP1= USD 1.5075~1.5095. Required:
What do you think is the best method if an American with 1 million USD in his
hands wants to profit from this circumstance? Please give your calculations in detail
(suppose all transactions can be freely undertaken in financial markets).
3 3 12%
3 8%
GBP1=USD2.00003 10
10
4 DM1=USD0.6440/501 DM 1.90/1.85
1 DM 10%1 6%
100 USD

2. -
1

Case1Fixed Exchange Rate System

a

Case2Floating Exchange Rate System

c
2

Case3Fixed Exchange Rate System

a
b
c
d
Case4Floating Exchange Rate System
e
f