One-year interest rates are 5% in the US and 8% in the UK. Currently the pound is worth $1.50.

a. What should the 12-month forward exchange rate for the pound be to rule out arbitrage opportunities?

b. You read in the newspaper that the 12-month forward is actually $1.40 /. Explain in detail how to exploit the mispricing using only the following instruments: buying or selling US or British 12-month bills, and buying or selling the pound forward. Ignore transaction costs. If you could only borrow the equivalent of $100,000, how much money would you make?