Question 1: The treasurer of a German firm has 5 million to invest for three months. The annual interest rate in the Germany is 4 percent: the interest rate in the United Kingdom is 2 percent. The spot rate of exchange is 1.1/£ and the three-month forward rate is 1.2/£. Ignoring transactions costs, in which country would the treasurer want to invest the company's capital using the forward market? Explain your answer.
Question 2: Suppose the spot rate of exchange between Germany and the UK at time t is $1.50/£. If the interest rate in the U.S. is 13 percent and it is 8 percent in the UK, what would you expect the one-year forward rate to be if no immediate arbitrage opportunities exist?