a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on

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a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?

b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.

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