You have $1000 to invest. Current spot rate of British pound is £1 = $1.75, 1-year forward rate of pound £1= $1.70, 1-year deposit rate in U.S.= 6%, 1-year deposit rate in Great Britain = 10%.
(a) If you use covered interest arbitrage for a 1-year investment, what will be the amount of U.S. dollars you will have after 1 year?
(b) Based on your calculation, explain where do you want to invest?