Question 5 The spot dollar-pound rate is $1.80/l and the one year forward rate is $1.75/1. You expect the spot dollar-pound rate will be $1.60/1 in one year's time. You have l million to speculate with (i) Do you buy or sell l million in the forward market? [1] ii) What is your profit in both dollars and pounds if you are correct and the spot dollar-pound rate is S1.60/El in one year's time? [2 (ii) What is you loss in both dollars and pounds if you are wrong and the spot sterling rate is S1.90/El in one years' time? [2] Question 6 What is a credit default swap (CDS)? Give a numerical example of how it works. 151