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.
2. What is the one-year forward exchange rate?
3. If Dustin Green invests based on his model, which currency would he buy forward?
4. If everyone were to start using Dustin Green's model and follow his transaction, what would happen to the exchange and interest rates?