Problem 6.

A US investor likes to invest in the foreign exchange market. After an analysis of US dollar to British pound exchange rate data over the past decade, he has come up with his own model to forecast the :$ exchange rate one year ahead. Based on this model, the forecast for the one-year-ahead exchange rate is $1.5315 per . The spot :$ is equal to 1.5620. The annual one-year interest rates 2% in dollars and 4.25% in pounds.

a)What is the one-year forward :$ exchange rate?

b)If the US investor invests based on his model, which currency would he buy forward?