1. You think that Britain will leave the EU without a deal at the end of 2020 and that this hard Brexit will cause the pound to depreciate from $1.30/ to $1.20/. You work for a US hedge fund and have a line of credit which allows you to borrow $100 million or its equivalent in New York or London. You can borrow or lend for 2 months in New York at an annual interest rate of 3% and borrow or lend in London at 75 basis points.

1. What does the interest parity condition predict that the exchange rate will be in a year?
2. What should you do to speculate on the depreciation of the pound?
3. How much money will you make after 2 months if you are right?
4. How much money will you make or lose if Britain makes an agreement with the EU and the pound appreciates to $1.35/ in the next 2 months?
5. The yen/dollar spot rate is 105 yen/$. What is the yen/pound spot rate if the dollar/pound spot rate is $1.30/?

f. Why are speculative attacks on currencies that float much less likely than speculative attacks on fixed exchange rate currencies?