1.Dustin Green likes to invest in the foreign exchange market. After an analysis of the last 10 years of U.S. dollar to British pound exchange rate data, he has come up with his own model to forecast the :S exchange rate one year ahead. Based on this model, the forecast for the one-year ahead exchange rate is $1.55 per . The spot :$ is equal to 1.5620. The annual one-year interest rates on the Eurocurrency market are 2.50 percent in dollars and 4.65 percent in pounds.

a.What is the one-year forward exchange rate?

b.If Dustin Green invests based on his model, which currency would he buy forward?

c.If everyone were to start using Dustin Green's model and follow his transaction, what would happen to the exchange and interest rates?

2.Suppose that the three-month forward Swiss franc to dollar rate is SFr1.450 per $. The forecast for the three-month ahead spot exchange rate by Analyst A is SFr1.430 per $ and the forecast by Analyst B is SFr1.530 per $. The actual spot rate realized three months later is SFr1.308 per $.

a.Which of the three forecasts, including the forward rate, is the most accurate?

b.If the spot rate at the time of prediction was SFr1.420 per $, which analyst(s) correctly predicted the appreciation of Swiss franc relative to the dollar?