1. Suppose that the current spot exchange rate is 1.40/ and the one-year forward exchange rate is 1.50/. The one-year interest rate is 8% in euros and 6% in pounds. You can borrow at most 7,000,000 or the equivalent pound amount, that is 5,000,000 at the current spot exchange rate. Assume that you are a pound-based investor, what is the pound amount of the arbitrage profit if you carry out covered interest arbitrage?

2. Standard & Poor's has for years provided credit ratings on international bonds,

A)	The ratings reflect the safety of principal for a U.S. investor.
b)	Their ratings reflect the creditworthiness of the borrower and not exchange rate uncertainty.
c)	Their ratings reflect creditworthiness of the lender and predict the exchange rate expected to prevail at maturity.
d)	The ratings are biased since 40 percent of Eurobond issues are rated AAA and 30 percent are AA.