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Assume that the 1-year forward exchange rate is currently traded at $1.25/E. The spot pound to US dollar exchange rate is $1.21/E.
An investor decides to undertake the following trade today:
o Borrow $1000 at the prevailing interest rate (0.425%)
o Use the borrowed funds to buy GBP in the spot market
o Invest the funds nominated in GBP at the prevailing interest rate (1.2%)
o Enter the forward contract to sell the expected proceeds for dollars one year from now.
Calculate the returns (profits) from this trade to the investor one year from now. (Calculation 6 marks) Comment on your results. ( appropriateness of comment, 7 marks)
