Question 4
a) Discuss the key differences between the operation of a currency forward market and a futures market.
b) Assume that the current (indirect for the UK) spot exchange rate of one pound to the dollar is $1.60/£ and that the corresponding three-month forward exchange rate is $1.59/£. Also, assume that the annualised 3-month interest rate on the pound is currently 4.00% and that the corresponding interest rate on the US dollar is 2.50%.
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Required:
(i) Based on the above information, use relevant computations as a basis for explaining whether you are likely to invest in the pound, or borrow the pound.
(ii) Using detailed workings, calculate the amount of profit that you will realise on each pound that you borrow, or invest.
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