Use Figure 30.1 to answer the following question. Suppose interest rate parity holds, and the current annual risk-free rate in the Eurozone is 3.8 per cent. Assume the UK one year forward rate is £0.8251. What must the annual risk-free rate be in Great Britain?

Figure 30.1

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Apr 7 Pakistan Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Is Poland Portugal Puerto Rico Qatar Reunion is de la Romania Russia Rwanda San Marino Sao Tome Saudi Arabia St Christopher St Helena St Lucia St Pierre & Miquelon St Vincent Senegal Serbia Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Is Somali Rep South Africa Spain Spanish Ports N Af Sri Lanka Sudan Rep Surinam Swaziland Sweden Switzerland Taiwan Tanzania Thailand Togo Rep Tonga Is Trinidad & Tobago Tunisia Turkey Turkmenistan Turks & Caicos Tuvalu Uganda Ukraine UAE United Kingdom United States Currency (Pak Rupee) (Balboa) (King) (Guarani) Uruguay Uzbekistan (New Sol) (Peso) (Sterling ) (Zloty) (Euro) (US $) (Riyal) (Euro) (New Leu) (Rouble) (Fr) (E Carib $) (E) (E Carib $) (Euro) (E Carib $) (5) (Euro) (Euro) (5) 4.0160 10000 4.0160 13696 4.0160 (Euro) 13696 (Dobra) 32529.6366 (Riyal) 5.5796 (CFA Fr) 898.3716 (Dinar) 164.2843 (Rupee) 19.9313 6477.6699 (Leone) 2.0212 13696 13696 (Shilling) (Rand) (Euro) (Euro) (Rupee) (E) (Dollar) (Lilangeni) (Krona) (Fr) (5) (Shilling) (Baht) (CFA Fr) (Pa'angal (5) (Dinar) (New Lira) (New Manat) (US $) (Australian $) POUND Closing Mid (E) (5) 1516042 1.4874 3.9840 7189.5636 4.6072 66.1600 10000 5.5387 1.3696 14874 5.4150 (Peso Uruguay) 11.3696 60487 817406 1028.5434 197.8998 8.8159 4.9084 17.5886 12.8381 1.4312 46.1536 2759.1444 48.4449 898.3716 (New Shilling) 4447.3540 (Hryvnia) (Dirham) Day's Change -10744 -0.0102 0.0122 0.0522 -1.3569 11.5842 11.8993 -10065069 17.5886 1.3696 1.3696 -0.0274 -58.6778 48336150 -0.0190 3.0975 -0.3210 44.4800 06723 0.0144 3.7237 0.0122 -0.0102 -0.0372 0.0122 0.0122 -0.0526 DOLLAR Closing Mid 0.0630 0.0122 0.0122 -15131 0.0667 -0.0338 0:0630 0.1344 0.0077 2.9992 -0.0203 9.4763 -0.0653 2.8993 0.0126 3.8522 0.0118 4.9828 -0.0343 14874 -0.0102 1.9437 -0.0105 3.7513 7.9940 603.9842 110.4500 13.4000 -29.6499 4355.0000 13094 -0.0774 -0.0007 101.9250 -0.0200 110.6954 10000 10860 2.6785 2.9089 59.6837 -3.3417 6915000 2.5000 751.0019 -0.0277 -0.0277 0.0122 0.9208 0.0144 -0.0277 2.7000 0.0122 0.9208 -1567092 21870.0000 -0.0384 0.9208 0.0144 4.0666 0.0627 54.9550 -0.5300 2.7000 06723 0.0046 2.7000 13589 0.9208 0.9208 7.7882 0.0351 4.0441 -0.0257 0.9208 0.0144 10000 10000 -00173 10860 0.0001 3.9538 -0.0629 36406 10000 4.4165 -0.0012 Day's Change 5.9270 3.3000 8.0000-672.0000 118250 8.6312 09622 -06130 -19.0085 1855.0000 -0.2139 32.5700 7.9940 603.9842 118250 0.1230 0.9208 0.0144 0.9208 0.0744 -6.1050 5249.5367 0.0085 33640 0.0900 48.3074 19828 6.3710 19492 2.5899 3:3500 10000 1.3068 34.9913 23.5250 5.4633 36731 10000 06723 14874 -0.0102 10000 38.0851 -0,4121 25.6050 (Sum) 3712.8111 -25.5793 2496.1600 EURO -45.6165 2990.0000 -0.1287 -0.0376 Closing Mid -90.3754 4017.4667 -50.2086 -0.0442 2.5745 -0.0217 -0.6704 36.9696 -0.3392 0.0046 0.7302 -0.0066 0.5588 -0.0024 3.0950 -0.0052 0.7653 0.0035 0.8312 -0.0093 30258 -0.0339 0.7653 0.0035 3.3800 0.0148 -15357 45.6759 -0.9580 -9.2069 574.7413 -4.3476 133.0500 -0.1000 144.4986 0.0851 2.9323 -0.0467 2.2441 -0.0252 0.7302 -0.0066 0.5588 -0.0024 2.2441 -0.0252 2.9323 -0.0467 10000 0.7653 0.0035 2.2441 -0.0252 2.9323 -0.0467 0.0144 10000 0.7653 0.0035 45.0000 237518599 -328.7730 18177.2846 -166.1344 4.0740 -0.0649 3.1179 -0.0350 9.4702 655.9556 -0.0020 502.0024 2.3268 -0.1127 91.8007 0.3399 16300 119.9540 0.0400 14.5530 -0.1877 11.1374 -0.0913 10.0000 4729.7380 -64.3235 3619.6651 -32.2092 0.0088 11295 -0.0053 0.0144 0.7653 0.014 0.7653 0.0182 Day's Change 0.0217 0.0256 0.0046 14758 -0.0138 10000 10000 8.4583 -0.1147 8.6884-7415902 0.1230 12.8425 0.1488 9.3739 0.0117 31.0295 -0.1970 33.6995 -0.7543 -1.7857 84.7151 -0.9673 -0.0173 08312 -0.0093 -0.0463 2.2262 -0.0250 12.8425 -0.0699 10000 10000 6.4370 3.5840 YEN (x100) Day's Mid Change Closing 0.0035 0.0035 6.4731 -0.0574 6.6492-564.8754 9.8284 -0.0069 0.7653 0.7653 -2.4125 110.5847 -0.0087 4.9262 -0.571 2.7428 -0.0689 0.0035 0.0035 -13248 0.0163 -0.0308 9.8284 -0.0069 0.0148 7.1738 0.0446 10450 -0.0037 0.7997 0.0009 25.7902 -0.4549 2014.6185 -32.0974 15417861 -17.2994 0.0800 35.3726 -0.4753 27.0706 -0.2365 9.4702 655.9556 -0.0020 502.0024 2.3268 2.1534 -0.0343 16480 -0.0185 6.91192 -0.1102 5.2953 -0.0594 2.1169 -0.0097 16201 0.0001 2.8128 -0.0166 2.1526 -0.0026 3.6383 -0.0580 2.7844 -0.0312 10860 -0.0173 08312 -0.0093 14192 -0.0204 10861 -0.0105 -10.0000 3247.2825 -62.7712 2485.1432 -36.2890 0.0750 25.5493 -0.3243 19.5528 -0.1564 3.9891 -0.0636 3.0529 -0.0343 0.7302 -0.0066 10860 0.0020 -0.1000 27.8082 -0.0173 -0.5534 -43.1913 20746873 -23.2788 2710.9491 0.5588 -0.0024 0.8312 -0.0093 212816 -0.3228