Suppose that interest rate on 6-month bonds in the US is 4 percent (per annum) and 8 percent (per annum) in the UK. Further suppose that the spot rate between the US dollar and the British pound if $1.5/. The 6-month forward rate is $1.485/ a) Suppose that a US investor believes that the spot rate 6 months from now (expected future exchange rate) would stay at $1.5/. What would their expected extra return be from investing in UK bonds instead of US bonds? (2 points) b) If the investor covers their exchange rate risk (by using the forward contract), then what would be the extra return? (4 points) c) How would the extra return of part b) affect the spot and forward rate? (Hint: think about what will happen to the supply/demand of foreign currency in the spot and forward markets) (2 points) d) Suppose that the spot rate remains unchanged. What should be the forward rate in order for the extra return to disappear? (4 points) Suppose that interest rate on 6-month bonds in the US is 4 percent (per annum) and 8 percent (per annum) in the UK. Further suppose that the spot rate between the US dollar and the British pound if $1.5/. The 6-month forward rate is $1.485/ a) Suppose that a US investor believes that the spot rate 6 months from now (expected future exchange rate) would stay at $1.5/. What would their expected extra return be from investing in UK bonds instead of US bonds? (2 points) b) If the investor covers their exchange rate risk (by using the forward contract), then what would be the extra return? (4 points) c) How would the extra return of part b) affect the spot and forward rate? (Hint: think about what will happen to the supply/demand of foreign currency in the spot and forward markets) (2 points) d) Suppose that the spot rate remains unchanged. What should be the forward rate in order for the extra return to disappear? (4 points)