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Find 12-month libor rates

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Reference no: EM132731422

The current 12-month USD Libor rate is 0.3% per annum. You run a regression of future percentage spot rate changes (St+1/St -1) on the forward premium/discount (Ft/St -1) for USD/ZAR, USD/AUD and USD/INR currencies:

Percentage change in the spot rate (t+1) = a + b*forward premium/discount (t) + error

The regression results as well as the 12-month Libor rates for the three currencies are provided below:

a b 12 month LIBOR rate
ZAR 0 1.01 3.5%
AUD -0.03. -1.15 0.5%
INR 0.02 -1.15 9.0%

Given the regression coefficient and the interest rates, which currency would be most suited for a carry trade? Approximately, what do you expect to earn from the carry trade?

Reference no: EM132731422

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