1. The current exchange rate is $1.65 for £1. The short-term annual interest rate in UK is 2%. Suppose, one-year futures exchange rate is $1.6 for €1. What should be the interest rate in the US to avoid arbitrage opportunities?
2. Assume that the 1-year risk-free interest rate is 6%. There is a temporary, unexpected glut of wheat on world markets due to an unusually large harvest. Storage costs are £10 per ton per annum (assume costs are ton. What is paid at the end of the year. The spot price of wheat is £600 per the approximate futures price of wheat for delivery in one year's time?
3. List three key distinctions between forward contracts and futures contracts. What is the additional source of risk faced by investors in forward contracts?