Forward contracts

Assume that the 1-year forward exchange rate is currently traded at $1.25/E. The spot pound to US dollar exchange rate is $1.21/E. An investor decides to undertake the following trade today: o Borrow $1000 at the prevailing interest rate (0.425%) o Use the borrowed funds to buy GBP in the spot market o Invest the funds nominated in GBP at the prevailing interest rate (1.2%) o Enter the forward contract to sell the expected proceeds for dollars one year from now. Calculate the returns (profits) from this trade to the investor one year from now. (Calculation 6 marks) Comment on your results. ( appropriateness of comment, 7 marks)