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Suppose that you have two choices to invest $100,000 for one year. First, you could purchase a U.S. bond that pays 10% interest for the year. Second, you could purchase a British bond that pays 5% for the year. Assume that both bonds mature in one year. The exchange rate is currently $1 = £0.8.
a. If you expect the exchange rate to be $1 = £1.2 when the bonds mature next year, which bond should you purchase? Why? What is your profit in each case?
b. If you expect the exchange rate to be $1 = £0.5 when the bonds mature next year, which bond should you purchase? Why? What is your profit in each case?