1. A US Firms UK Subsidiary pays £100,000 in yearly interest expense. The US income tax rate is 35 percent and the spot exchange rate is £.75/$. If the $ appreciates to £.85/$, what is the impact on the firms interest expense after taxes.

A. An increase in interest expense of $10,196

B. A Reduction in interest expense of $5,490

C. A Reduction in interest expense of $10,196

D. An increase in interest expense of $5,490

2. An investment manager hedges a portfolio of bunds with a six-month forward contract. The current spot rate is £1.61/$. At the end of the six-month period, the bunds have risen in value by 4.75% (in £ term), and the spot rate is now £1.46/$. The bunds earn interest at the annual rate of 6% paid semiannually. What is the investments managers total dollar return on the hedged bunds? What is the total dollar return on the bunds without hedging.

A. 8.23% 19.35%

B. 9.76% 21.03%

C. 11.32% 23.04%

D. 19.35% 8.32%