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).

A)Increase

B) Decrease

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:

A)Increase

B) Decrease

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:

A) Greater than $1.40 per pound.

B) Smaller than $1.40 per pound.