The current exchange rate is US$ 1.30/, the U.S. risk-free interest rate is 1% per annum and the UK risk-free interest rate is 5% per annum (both expressed with continuous compounding).

a) What should the forward exchange rate (in $/) be for a contract that matures in 15 months (round to the nearest cent)?

b) If you observe that the quoted 15-month forward exchange rate is currently US$ 1.45/, what are the 15-month domestic yield and covered foreign yield (round to the nearest cent)?

c) To take advantage of the arbitrage opportunity, would you borrow in pounds and invest in dollars or borrow in dollars and invest in pounds?