\a) Using a no-arbitrage argument derive an expression for the k-period forward price in domestic currency of one unit of foreign currency. Denote that Fk is the k-period forward price, S the current spot price of the foreign currency, r is the one-period risk free domestic interest rate and rf is the one-period foreign interest rate. (b) Suppose you observe that today's spot exchange rate between sterling and the US dollar is 1 = $1.32, while the one-year forward rate is 1 = $1.38. One-year interest rates are 4% for the US dollar and 2% for sterling. 1. What should the forward rate be, assuming interest rate parity? ii. Assume you can borrow today 1 million or the equivalent in US dollars. Calculate the arbitrage profit you could make, showing clearly the steps in the strategy. (c) Explain how a UK firm can hedge a US dollar receipt expected in one year's time using forward exchange contracts and currency futures. What are the advantages and disadvantages of each type of hedge