1. The spot exchange rate is $1.40 per pound. The interest rates in US and UK are 1% and 3% respectively. An investor borrows $1000 US dollars, converts the amount into pounds and invests in a pound denominated bond. How many pounds does the investor gets for $1,000? (Convert at $1.50 per pound)

Report the answer rounded to two decimal places without the currency symbol.

2. The spot exchange rate is $1.50 per pound. The interest rates in US and UK are 1% and 3% respectively. An investor borrows $1000 US dollars, converts the amount into pounds and invests in a pound denominated bond.

How many pounds does the investor will have at the end of the year? (Add 3% interest to the answer for question 1.)

Report the answer rounded to two decimal places without the currency symbol.

3. The spot exchange rate is $1.50 per pound. The interest rates in US and UK are 1% and 3% respectively. An investor borrows $1000 US dollars, converts the amount into pounds and invests in a pound denominated bond. If the exchange rate does not change over the year how many dollars will the investor have at the end of the year? Use the answer from question 3. Report the answer rounded to two decimal places without the currency symbol.

4. What is the repayment at the end of the year on the dollar denominated loan from question 1? Report the answer rounded to two decimal places without the currency symbol.

5. Based on the information from the previous questions what is the profit earned by the investor?

Report the answer rounded to two decimal places without the currency symbol.

6. The spot exchange rate is $1.40 per pound. The one year ahead forward rate is $1.38 per pound. If the interest rates are 1% in US and 3% in UK what will be the profit earned by an investor who borrows in dollars and invests for one year in a pound denominated bond? Assume the investor uses the forward contract to convert the pounds back to dollars at the forward rate. Report the answer rounded to two decimal places without the currency symbol.

7. The spot exchange rate is $1.50 per pound. The interest rates are 1% in US and 3% in UK. What is the one year ahead forward rate that will eliminate all opportunities for arbitrage profits? Report the answer rounded to two decimal places without the currency symbol.

8. When interest rate parity is used to determine the spot exchange rate (the demand supply diagrams) an increase in the US interest rate, all other inputs remaining constant, will make the exchange rate (dollars per pound).

9. One conclusion from the analysis of spot exchange rate using the ROR diagram is that an increase in the expected future spot rate will cause the current spot exchange rate to:

10. The spot exchange rate is $1.40 per pound. The interest rate in US is 2% and the interest rate in UK is 5%. If the uncovered interest parity holds the expected spot exchange rate (dollars per pound) will be: