Suppose that at date t = 0, you agree to a forward contract to buy one dollar at date t = 1 at a price of F pounds. The UK risk-free interest rate (for both borrowing and lending) over the period is rs = 3/5, (60%), and the US risk-free interest rate (for both borrowing and lending) over the period is rd = 1/2, (50%). The spot exchange rate at date t = 0 is S0 = 3/4 pounds per dollar (75 pence). Let S1 denote the spot rate at date t = 1. As of date t = 0, S1 is uncertain. You may assume there is no bid-ask spread for exchange between the pound and the dollar.

Explain how you can replicate the payoff to the forward contract using the money markets in the UK and the US and the current spot exchange rate.