Question: Look at Table 22.1. If the 3-month forward exchange rate is USD1.55 = GBP1 and the 3-month interest rate on dollars is 3.5% (effective annual

Look at Table 22.1. If the 3-month forward exchange rate is USD1.55 = GBP1 and the 3-month interest rate on dollars is 3.5% (effective annual rate), what do you think is the 3-month sterling (U.K.) interest rate? Explain what would happen if the rate were substantially above your figure.(Hint: In your calculations remember to convert the annually compounded interest rate into a rate for 3 months.)

* Direct quotes (number of U.S. dollars per unit of foreign currency). Other quotes are indirect (units of foreign currency per U.S. dollar).

Countrv Currencv Exchange Rate Euro zone countries Euro (EUR or )* Krona (SEK) United Kingdom Americas Pound (GBP or )* 6 1 rica Dollar (AUD) Yen (JPY or South Africa South Korea 3 1

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