1) Take the case of a US firm that wishes to invest some funds (US dollars) for a period of one year. The choice is between investing in a US bond with one year to maturity, paying an interest rate of 2.75 percent and a U.K. bond with one year to maturity, paying an interest rate of 4.25 percent. The currenct exchange rate is $1.46 per pound and the one year forward exchange rate is $1.25 per pound. Should the US firm invest in US bond or UK bond? Explain
2) Consider a German firm taht wishes to invest euro funds for a period of one year. the firm has a choice of investing in a euro bond with one year to maturity, paying an interest rate of 3.35 percent and U.S. dollar bond with one year to maturity, paying an interest rate of 2.25 percent. The current exchange rate is euro 1.25 per dollar. Should the german firm invest in euro bond or in the US bond? Explain