1)  Given the following spot exchange quotes:

	Bid	Ask
British Pound in United States Dollars	$1.99	$2.00
French Franc in United States Dollars	$0.200	$0.201
British Pound in French Francs	FF10.8	FF11.0

At a bid price of 1.99 $/£ and 0.2 $/FF the implied bid price of FF/£ = 1.99/0.2 = FF9.95.  Similarly, at an ask price of 2.00 $/£ and 0.201 $/FF the implied ask price of FF/£ = 2.00/0.201 = FF9.950249.  Therefore the French franc is overvalued compared to dollars and pounds.  To take advantage of this disequilibrium convert dollars to pounds, pounds to francs and then francs back into dollars:  

$10,000 / 2.00 = £5,000
£5,000 x 10.8 = FF54,000
FF54,000 x 0.200 = $10,800

The resulting profit is $10,800 - $10,000 = $800.

2)  

a)  First convert the $1,000,000 to £500,000 and deposit the funds in a British bank.  At the same time set up a forward contract to sell pounds at $2.00.  At maturity your deposit will be £500,000 x 1.04 = £520,000.  Exercise the forward contract:  £520,000 x 2.00 = $1,040,000.  You realize a profit of $40,000.  If the funds were left on deposit in the United States the value at maturity would have been $1,000,000 x 1.02 = $1,020,000, a differential of <$20,000>.

b)  First convert the $1,000,000 to £497,512 and deposit the funds in a British bank.  At the same time set up a forward contract to sell pounds at $1.99.  At maturity your deposit will be £497,512 x 1.035 = £514,925.  Exercise the forward contract:  £514,925 x 1.99 = $1,024,701.  If the funds were left on deposit in the United States the value at maturity would have been $1,000,000 x 1.0247 = $1,024,700, a differential of <$1>.  Considering the size of the investment and rounding errors this equates to no profit differential.

3)  Expected E^h = E^h x [1 + (I^h - I^f)] = $0.20 x [1 + (.01 - .06)] = $0.20 x [1 + (-.05)] = $0.20 x .95 = $0.19.

4)  According to the current rate method assets and liabilities are translated at the current rate of $1.50/£ and owner's equity is translated at the historical rate of $2.00/£.  The resulting translation is as follows:

Assets			Liabilities & Equity
Cash	$ 15,000		Accounts Payable	$ 18,000
Receivables	7,500		Accrued Expenses	7,500
Inventory	22,500		Long Term Debt	19,500
Fixed Assets	30,000		Equity	40,000
			Translation Loss	<10,000>
	$ 75,000			$ 75,000