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Question: (a) What is the no-arbitrage price for a 1-year UK Pound Sterling foreign-exchange forward denominated in US Dollars, if the current exchange rate is $1.65/£, the risk-free interest rate in the UK is 3% per year, and the risk-free interest rate in the US is 2% per year?

(b) Carefully outline the steps a US investor must undertake in order to invest $1000 in UK Gilts (risk-free bonds), assuming his current wealth is in US Dollars, and that he wants to consume his money in US Dollars afterwards. Assume he uses the foreign-exchange forward you priced in the previous part in converting his money back to Dollars at the end of his investment.

(c) When pursuing this strategy, is the investor exposed to any foreign-exchange rate risk? Why or why not?

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