1. Suppose that both the spot and the one-year forward exchange rates for the British pound are $1.70. Suppose also that a bank can borrow or lend dollars at 4% interest and can borrow or lend pounds at 5% interest for one year.

1. The bank should borrow in ___________ and lend in ____________.

2. The bank should purchase ______________ in the spot market and simultaneously purchase a forward contract to sell ____________ in one year.