1. Suppose that the exchange rate (spot price) of Euro in GBP (British Pound) is GBP 0.95. In addition, assume that you can freely borrow and lend in GBP for any maturity at a rate of 2% per annum and that you can do the same in Euro at a rate of 1% per annum. Both rates are continuously compounded rates. Given these assumptions:

1. Compute the forward price (exchange rate) of the GBP in Euro for delivery of the GBP in one year.
2. Compute the forward price (exchange rate) of the Euro in GBP for delivery of the Euro in one year.

2. Given the same information as in question 6 above, you realize, when you call your bank, that the forward price (exchange rate) of the GBP in Euro for delivery in one year is Euro 1.1. Present a trade which will let you lock in an arbitrage profit by buying or selling GBP spot and/or forward, borrowing or lending money in the Euro interest rate markets, and borrowing or lending in the GBP interest rate markets.