1.George Soros and others launched a speculative attack on the British pound in 1992 when the pound was pegged to the German deutsche mark (DM).Suppose the exchange rate was 5DM/.

a. Suppose Soros thought the pound would depreciate by 10% within a month.Suppose the interest rate in Frankfurt was 6% per year and in London it was 10%.If you had a line of credit that allowed you to borrow local currency worth 100 million, where would you borrow and lend?How much money could you make in a month if the pound actually did depreciate by 10%?Give your answer in both DM and pounds.

b. What interest rate would the Bank of England have to set to keep the peg at 5DM/?