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Suppose you are given the following financial information onJanuary 1, 2020:

Spot $/£ exchange rate(e):                                       $1.20/£

One-year interest rate on dollars(i_US):                      2.0%

One-year interest rate on pounds(i_UK):                     6.0%

Market’s expected spot rate in oneyear(e^ex):           $1.12/£

1. If a U.K. investor looking for the highest return agrees withthe market’s expectation of the future spot rate, should she makean uncovered investment in dollars or simply invest in pounds?
2. If a U.S. firm will be receiving £1,000,000 in one year, andwants to eliminate any foreign exchange risk, what can the firm doin the money markets?
3. A U.S. firm will be receiving £1,000,000 in one year, anddiscovers that forward contracts are available. Its bank quotes thefirm a forward rate of f = $1.15/£? What would the firm do toeliminate any foreign exchange risk using a forward contract?

D. Suppose there is still trading in the spot foreign exchangemarket today, but the market’s expected spot rate in one year isset at $1.12/£. What is the equilibrium spot rate in the markettoday at which uncovered interest rate parity holds?