Question $3$

a$)$ Distinguish between the different types of foreign exchange exposure. Use examples to

support your answer.

$(6$ marks$)$

b$)$ Discuss the key differences between the operation of a currency forward market and a

futures market.

$(7$ marks$)$

c$)$ Assume that the current $($indirect for the UK$)$ spot exchange rate of one pound to the dollar

is $$\frac{1\mathrm{.}6}{}1$ and that the corresponding three$-$month forward exchange rate is $$\frac{1\mathrm{.}6}{}1.$

Also, assume that the annualised $3-$month interest rate on the pound is currently $4\mathrm{.}00\%$

and that the corresponding interest rate on the US dollar is $2\mathrm{.}50\%.$

Based on the above information:

i$)$ will you invest in the pound or borrow the pound? Perform any relevant calculations

and provide an explanation for your answer.

$(6$ marks$)$

ii$)$ calculate the amount of profit that you will realise on each pound that you borrow or

invest.

$(6$ marks$)$

$($Total: $25$ marks$)$