Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today's spot exchange price of the pound is $2.00 while the 6-month forward exchange price of the pound is $1.98.
1. In the forward market, pound is :
a. at discount, 1% per year
b. at discount, 2% per year
c. at premium, 1% per year
d. at premium, 2% per year
2. If US investors cover their exchange rate risk by going into the forward market, the extra return from investing in UK treasury bills is:
a. 1% per year
b. 1.5% per year
c. 2% per year
d. no possible to detremine without additional information