On March 20, a Detroit investor decides to invest \($1\) million in a British 3-month certificate of deposit (CD) with an annual yield of 20 percent. He expects that this 20 percent rate of return on the British CD will be more than he could have realized by investing in the domestic market. The investor buys British pounds in the spot market and purchases the CD from a British bank. The exchange rates are \($2.0000\) per pound in the spot market and \($2.0050\) per pound in the futures market for June delivery (June 20).

(a) The investor buys enough British pounds in the futures market to cover the principal and accrued interest at the time of maturity. Summarize the transaction.

(b) By June 20, the British pound has depreciated to \($1.8500\) per pound. Remember that the spot rate and the futures rate become the same by the delivery date. On June 20, the investor decides to close the position by selling British pounds in the spot market and reversing the futures contracts. Summarize the transaction.

(c) Compare the exchange gain (loss) from the futures transaction with the exchange loss (gain) from the spot transaction. What is the windfall profit (net exchange gain)?

(d) If the investor had not hedged his investment, how much exchange loss would he have suffered on the transaction? Remember that the British pound has depreciated to \($1.8500\) on June 20.