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Use the following information to answer the next two questions. Assume you have $10,000 to invest; the current spot rate of British pounds is...
Use the following information to answer the next two questions. Assume you have $10,000 to invest; the current spot rate of British pounds is $1.800/£; the 90-day forward rate of the pound is $1.730/£; the annual interest rate in the US is 6%; the annual interest rate in the UK is 6.5%. (For the answer to be acceptable you need to show the calculation.)
a. Where would you invest your $10,000 to maximize your return with no foreign exchange risk? (Show how many USD you will have for sure if you invest in the US versus if you invest in the UK.) (4 marks)
b. Given the US interest rate, the UK interest rate, and the spot rate, what would be an equilibrium forward exchange quotation? (The interest rates quoted are per annum, i.e., per 360 days, the forward is for 90 days.) (3 marks)
