Q 1 to Q 7. These seven questions are all linked.

In this series of questions, we assume (to simplify) that there are no bid-ask spreads in the markets for exchange rates and for rates.

Jennifer is a trader at a hedge fund.

The spot exchange rate today for the number of USD per GBP is 1.3200. The U.S. interest rate applicable for one year from today is 9%. The British interest rate applicable for one year from today is 10%.

1./ Preliminary question: What is the forward exchange rate (expressed as the number of USD per GBP and assuming no arbitrage) as of today for delivery in one year from now? Enter the rate to 4 decimal places.

Today, Jennifer forms the view that the spot rate in one year from now will (in her opinion or best guess) be 1.2500. Based on her opinion, she is authorized to borrow 20 mio GBP to speculate in the market.

2./ What strategy does Jennifer do?

Pick the most appropriate:

a./ Borrow 20 mio GBP for one year, buy GBP spot, invest USD in deposit, sell GBP one year from now and repay GBP loan.

b./ Borrow 20 mio GBP for one year, sell GBP spot, invest USD in deposit, sell USD from maturing deposit one year from now and buy back GBP and repay GBP loan.

c./ Only Oliver the Finance Pug knows!

3./ Suppose the spot rate one year from now turns out to be (as Jennifer guessed) 1.2500. How many GBP does Jennifer's company make in profit (if the amount is a loss, enter with a minus sign)? Give your answer in GBP to two decimal places.

4./ Suppose instead that Jennifer's guess is wrong and the spot rate one year from now turns out to be 1.2000. How many GBP does Jennifer's company make in profit (if the amount is a loss, enter with a minus sign)? Give your answer in GBP to two decimal places.

5./ Suppose instead that Jennifer's guess is wrong and the spot rate one year from now turns out to be 1.3080. How many GBP does Jennifer's company make in profit (if the amount is a loss, enter with a minus sign)? Give your answer in GBP to two decimal places.

6./ Suppose instead that Jennifer's guess is wrong and the spot rate one year from now turns out to be 1.3200 (i.e., the same as today's spot rate). How many GBP does Jennifer's company make in profit (if the amount is a loss, enter with a minus sign)? Give your answer in GBP to two decimal places.

7./ Suppose instead that Jennifer's guess is wrong and the spot rate one year from now turns out to be 1.5000. How many GBP does Jennifer's company make in profit (if the amount is a loss, enter with a minus sign)? Give your answer in GBP to two decimal places.