1.  Suppose you have the following spot exchange rates:

  £1 = $1.57,     euro 1 = $1.23,    and     £1 = euro 1.25.

i)  Please check if the cross rate between the euro and the UK pound (£) is consistent or not.

ii)  How much profit (in $ terms) could you make from trading $1,000?  Describe your trading process to get your profit.

2.  You purchased a European foreign exchange option contract to buy 5000 UK pound at the price of $1.66/£ which expires today.  You have paid $250 for the contract.  Suppose the spot rate on the expiration date, today, is $1.69/£, what will be your optimal decision for the contract (exercise or not exercise)?

3.  The recent market data on the U.S. and UK are shown as:

     the spot rate of the UK pound                 $1.55/£

     the 90-day forward rate                         $1.57/£

     the 180-day forward rate                        $1.58/£

     your expected future spot rate in 3 months   $1.56/£

     your expected future spot rate in 6 months   $1.59/£

     interest rate (TB) in the U.S.:                    4% (per year)                                         

     interest rate (TB) in the UK.:                      2% (per year)

If you have $1 million available for 3 months, where do you want to invest (assume no transaction costs)?