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1. Suppose the estimated slope coefficient in a regression of the rate of depreciation of the dollar relative to the yen on a constant and the forward discount on the dollar is - 2, and the standard deviation of the forward discount, measured on an annualized basis, is 2.5%. What is a lower bound for the variability of the risk premium in the yen-dollar forward market?

2. Suppose the British pound (GBP) is pegged to the euro (EUR). You think there is a 5% probability that the GBP will be devalued by 10% over the course of the next month. What interest differential would prevent you from speculating by borrowing GBP and lending EUR?

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