Problem FORW$-79$B

Today is "time $0".$ In what follows, we regard the dollar as the domestic currency and the

pound as the foreign currency. It is given that

$,$ The exchange rate is $1\mathrm{.}8$ dollars$/$pound$.$ That is$,$ one pound costs $$1\mathrm{.}8.$

A dollar$-$denominated zero$-$coupon bond $($with $$1$ face value$)$ maturing in $300$

days costs $$0\mathrm{.}9750.$

$,$ A pound$-$denominated zero$-$coupon bond $($with $1$ face value$)$ maturing in $300$

days costs $0\mathrm{.}9500.$

$($a$)$ What should be the time$-0$ value of a dollar$-$denominated forward contract on $1,$

expiring $300$ days from now, where the delivery price $($fixed price$)$ paid at that

time is $$2\mathrm{.}00?($Show work. Be exact to within $\mathrm{.}0001$ at least.$)$

$0-$downpayment

forward contract.

$($b$)$ For a forward contract on $1$ as in part $($a$),$ explain how its payoff can be

replicated by a position $($investment strategy$)$ in the foreign bond and in the

domestic bond.

If you prefer, you can use lending$/$borrowing instead of buying$/$selling bonds.