What must be the forward price of the pound for delivery 1 year from now? 1 answer below »

a. The spot price of the British pound is currently $2.00. If the risk-free interest rate on 1-year government bonds is 4% in the United States and 6% in the United Kingdom, what must be the forward price of the pound for delivery 1 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 ( a )? Give a numerical example.